Just group PLC | Annual Report and accounts 2022
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1 SIGNIFICANT ACCOUNTING POLICIES continued ii) IFRS 9 ‘Financial instruments’ Background
IFRS 9 ‘Financial instruments’ replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for accounting periods beginning on or after 1 January 2018. However, the Group has met the relevant criteria and has applied the temporary exemption from IFRS 9 for annual periods before 1 January 2023, the date at which IFRS 17 becomes effective. Consequently, the Group will apply IFRS 9 commencing 1 January 2023, with comparative periods restated. The IFRS 9 standard is applicable to financial assets and financial liabilities and covers the classification, measurement, impairment and de-recognition of financial assets and liabilities together with a new hedge accounting model. Financial assets The Group’s business model is to manage financial instruments on a fair value basis. The Group will therefore adopt the approach allowed within the standard to continue to measure the majority of its financial assets at fair value through profit or loss. This remains appropriate as it is consistent with the Group’s business model and the management of the underlying instruments. The Group is investigating the opportunity to create a separate amortised cost portfolio of newly acquired surplus assets which would back the CSM reserve which is not interest rate sensitive. For the residual financial assets which are measured at amortised cost, IFRS 9 operates an expected credit loss model rather than an incurred credit loss model. Providing for an expected credit loss on our existing financial assets, measured at amortised cost, is not expected to have a material impact on Group
shareholders’ funds. Financial liabilities
As explained above in the section on IFRS 17, the existing reinsurance deposit-back IAS 39 financial liabilities will move to within the scope of IFRS 17. Other than this, IFRS 9 retains the requirements in IAS 39 for the classi cation and measurement of nancial liabilities, and hence there are no further changes required in this area.
Hedge accounting The Group does not currently apply hedge accounting and therefore will not be impacted by the new requirements of IFRS 9.
The following amendments to existing standards in issue have not been adopted by the Group and are not expected to have a significant impact on the financial statements. • IAS 1, Presentation of financial statements – Amendments in respect of disclosures of accounting policies (effective 1 January 2023, not yet endorsed); • IAS 1, Presentation of financial statements – Amendments in respect of the classification of liabilities as current or non-current (effective 1 January 2024, 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 regarding 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 in applying accounting policies are as follows.
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 on 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.
1.17
Classification of financial investments
1.17
Measurement of fair value of loans secured by residential mortgages, including measurement of the no-negative equity guarantees
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