Just Annual Report and Accounts 2023

Strategic Report | Governance | Financial Statements | 155

1. MATERIAL ACCOUNTING POLICIES continued 1.6.1.4. Classification of financial assets and financial liabilities on adoption of IFRS 9

The following table shows the original measurement category and carrying amount under IAS 39 and the new measurement category and carrying amount under IFRS 9 for each class of the Group’s financial assets and financial liabilities as at 31 December 2022. There has been no significant change in the measurement basis (either FVTPL or amortised cost) as a result of the adoption of IFRS 9, nor is there a change to the carrying amount of financial instruments on the opening balance sheet presented as at 1 January 2022.

Carrying amount under IAS 39 £m

New carrying amount under IFRS 9 £m

Original classification under IAS 39

New classification under IFRS 9

2022

Financial assets Financial investments – Derivative assets – Residential mortgages

FVTPL (held for trading) FVTPL (designated) FVTPL (designated) Loans and receivables Loans and receivables

FVTPL (mandatory) FVTPL (mandatory)

2,277 5,306

– All other financial investments

FVTPL (business model)

15,769

Other receivables

Amortised cost Amortised cost

Cash available on demand Financial liabilities Investment contract liabilities Loans and borrowings Other financial liabilities – Derivative liabilities – Other financial liabilities

482

FVTPL (designated)

FVTPL (accounting mismatch)

Amortised cost

699

FVTPL (held for trading)

FVTPL (mandatory)

3,046

Amortised cost Amortised cost

623

Other payables

Amounts reported in this table include the amounts reported as at 31 December 2022 in the 2022 financial statements adjusted for the reclassifications of certain balances as required by IFRS 17. 1.6.2. Classification of financial assets and financial liabilities The Group classifies its financial assets into either the Amortised Cost or FVTPL measurement categories. The Group measures its financial assets according to the business model applied. This reflects how the Group manages financial assets either in order to solely collect the contractual cash flows from assets (measured at amortised cost), or collect both the contractual cash flows and cash flows arising from the sale of assets (measured at FVTPL). Business model – measurement of financial investments at FVTPL Financial investments which back the net insurance fulfilment cash flows are classified as part of the fair value business model and measured at FVTPL. Factors considered by the Group in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed, and how managers are compensated. To ensure that the contractual cash flows from the financial assets are sufficient to settle those liabilities, the Group undertakes significant buying and selling activity on a regular basis to rebalance its portfolio of assets and to meet cash flow needs as they arise. Investments are measured at fair value with any gains and losses recognised in Investment return in the Consolidated statement of comprehensive income. Transaction costs are recognised in Other operating expenses when incurred. The Groups’ investments in Lifetime Mortgages, which contain No Negative Equity Guarantees, are included in financial investments measured at FVTPL. Derivative instruments All derivative instruments, both assets and liabilities are classified as FVTPL in accordance with IFRS 9. All derivatives are carried as assets when the fair value is positive and liabilities when the fair values are negative. The Group does not use hedge accounting. Amortised cost The Group has classified bank balances and other receivables at amortised cost. These financial assets are eligible for this measurement as they contain payments of solely payments of principal and interest and are not held for trading purposes. In addition, the Group has purchased a distinct portfolio of sovereign gilts where the purpose of holding the instruments is to collect solely payments of principal and interest. This portfolio is managed separately from the assets that are held to back the insurance contract fulfilment cash flows (net of reinsurance), financial liabilities measured at amortised cost, and equity balances. The Group has policies and procedures which define the framework for when disposals of these gilts can occur, which is expected to be in extremely limited circumstances. Transaction costs incurred on financial assets measured at amortised cost are capitalised to the underlying instrument and are included in the determination of the effective rate of interest.