119
FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES continued 1.23 Investment contract liabilities
Investment contracts are measured at fair value through profit or loss in accordance with IAS 39. The fair value of investment contracts is estimated using an internal model and determined on a policy-by-policy basis using a prospective valuation of future Retirement Income benefit and expense cash flows. 1.24 Loans and borrowings Loans and borrowings are initially recognised at fair value, net of transaction costs, and subsequently amortised through profit or loss over the period to maturity at the effective rate of interest required to recognise the discounted estimated cash flows to maturity. 1.25 Other provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The amount recorded as a provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected expenditure. 1.26 Taxation The current tax expense is based on the taxable profits for the year, using tax rates substantively enacted at the Consolidated statement of financial position date, and after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity as appropriate. Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from the revaluation of certain financial assets and liabilities, including technical provisions and other insurance items and tax losses carried forward, and include amortised transitional tax adjustments resulting from changes in tax basis. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 2 PRIOR YEAR RESTATEMENT A reclassification has been made regarding the presentation of the Group’s longevity reinsurance swaps at 31 December 2019 and 1 January 2019. The longevity swaps relate to DB, GIfL and Care business in Just Retirement Limited. Under the swap arrangements the Group is committed to pay the reinsurer a schedule of fixed payments for each relevant scheme and the reinsurer undertakes to reimburse the actual cost of the claims to the Group. The Group’s policy is to recognise claim recoveries on longevity swap contracts as the net amounts due as a result of comparing the actual payments made to policyholders with the fixed contractual payments where settlement of the contract is on a net basis. Reinsurance premium expenses represent swap management fees and are included under Outward reinsurance premiums. Reinsurance assets and Reinsurance liabilities are recognised on a net basis where the Group has legal right of set-off. Amounts receivable from or payable to reinsurers are recognised on a net basis and included under the appropriate heading under Insurance and other receivables or Insurance and other payables. At 31 December 2019 and 1 January 2019 the longevity swaps showed a liability position which was reported as a reduction to reinsurance assets. However, the Group does not have a legal right of set-off against other reinsurance assets in respect of these liabilities, since the longevity reinsurance swaps are held with different counterparties to those of the reinsurance assets. Accordingly, in line with the requirements of IAS 32, Financial instruments: Presentation, these balances have been reclassified to reinsurance liabilities on the face of the Statement of Financial Position at 31 December 2019 and at 1 January 2019. The impact of this reclassification at 31 December 2019 is an increase to reinsurance assets of £128.6m and an increase to reinsurance liabilities of the same amount. There is no impact to total equity or to comprehensive income (1 January 2019: increase to reinsurance assets of £111.6m and increase to reinsurance liabilities of the same amount, no impact to total equity or to comprehensive income).
3 NET INVESTMENT INCOME
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
Interest income: Assets at fair value through profit or loss
631.7
663.0
Movement in fair value: Financial assets and liabilities designated on initial recognition at fair value through profit or loss
818.3 327.7
658.8 129.9
Derivative financial instruments (note 28)
Total net investment income
1,777.7
1,451.7
4 ACQUISITION COSTS
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
14.9 29.6 44.5
Commission
14.8 20.4 35.2
Other acquisition expenses Total acquisition costs
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