Annual Financial Report (Part

RNS Number : 0639Q

Standard Life plc

07 April 2009

Standard Life plc

Annual Report

and Accounts

2008

PART 2 OF 6

Independent auditors' report to the members of Standard Life plc

We have audited the consolidated financial statements of Standard Life plc for the year ended 31 December 2008 which comprise the Consolidated income statement, the Consolidated balance sheet, the Consolidated statement of recognised income and expense, the Consolidated cash flow statement, the accounting policies and the related notes. These consolidated financial statements have been prepared under the accounting policies set out therein.

We have reported separately on the Company financial statements of Standard Life plc for the year ended 31 December 2008 and on the information in the Directors' remuneration report that is described as having been audited.

Respective responsibilities of Directors and auditors

The Directors' responsibilities for preparing the Annual Report and Accounts and the consolidated financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Directors' responsibilities for preparing the financial statements.

Our responsibility is to audit the consolidated financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the consolidated financial statements give a true and fair view and whether the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors' report is consistent with the consolidated financial statements. The information given in the Directors' report includes that specific information that is cross referred from the business review section of the Directors' report.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed.

We review whether the corporate governance statement reflects the Company's compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and Accounts and consider whether it is consistent with the audited consolidated financial statements. The other information comprises only the Chairman's statement, the Group Chief Executive's statement, the Business review, the Directors' report, the unaudited sections of the Directors' remuneration report and the other information as listed on the contents page. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the consolidated financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements are free

from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements.

Opinion

In our opinion:

the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group's affairs as at 31 December 2008 and of its profit and cash flows for the year then ended;

the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and

the information given in the Directors' report is consistent with the consolidated financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors

Edinburgh

12 March 2009

The maintenance and integrity of the Standard Life website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Consolidated income statement

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Revenue
Gross earned premium		3,564	3,732
Premium ceded to reinsurers	31	(6,338)	(86)
Net earned premium		(2,774)	3,646
Net investment return	2	(13,531)	5,803
Fee and commission income	3	622	593
Other income		93	71
Total net revenue		(15,590)	10,113

Expenses
Claims and benefits paid		7,142	7,598
Claim recoveries from reinsurers		(571)	(66)
Net insurance benefits and claims		6,571	7,532
Change in reinsurance assets	30	(5,559)	311
Change in insurance and participating liabilities	30	(7,021)	(2,336)
Change in investment contract liabilities	30	(10,907)	2,073
Change in unallocated divisible surplus	32	(184)	(247)
Expenses under arrangements with reinsurers	4	92	-
Administrative expenses
Restructuring and corporate transaction expenses	8	73	31
Other administrative expenses	5	2,391	2,266
Total administrative expenses		2,464	2,297
Change in liability for third party interest in consolidated funds	28	(598)	(78)
Finance costs	5	129	122
Total expenses		(15,013)	9,674

Share of profits from associates and joint ventures	15	101	181

(Loss)/profit before tax		(476)	620

Tax (credit)/expense attributable to policyholders' returns	9	(334)	111

(Loss)/profit before tax attributable to equity holders' profits		(142)	509

Total tax (credit)/expense		(493)	44
Less: Tax attributable to policyholders' returns		334	(111)
Tax credit attributable to equity holders' profits	9	(159)	(67)

Profit for the year		17	576

Attributable to:
Equity holders of Standard Life plc		100	465
Minority interest	28	(83)	111
		17	576
Earnings per share
Basic (pence per share)	11	4.6	21.7
Diluted (pence per share)	11	4.6	21.4

The Notes on pages 107 to 242 are an integral part of these consolidated financial statements.

Pro forma reconciliation of Group underlying profit to profit for the period

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Underlying profit before tax attributable to equity holders of Standard Life plc
Life and pensions
UK		184	395
Canada		(102)	168
Europe		65	63
Other		(35)	(12)
Total life and pensions		112	614
Investment management		42	83
Banking		26	32
Healthcare		11	13
Other		(37)	(28)
Underlying profit before tax attributable to equity holders of Standard Life plc and adjusted items		154	714
(Loss)/profit attributable to minority interest		(83)	111
Underlying profit before tax attributable to equity holders and adjusted items		71	825
Adjusted for the following items:
Volatility arising on different asset and liability valuation bases	10	(141)	(302)
Restructuring and corporate transaction expenses	8	(72)	(31)
Profit on part disposal of associate		-	17
(Loss)/profit before tax attributable to equity holders' profits		(142)	509
Tax credit attributable to:
Underlying profit		100	11
Adjusted items		59	56
Total tax credit attributable to equity holders' profits		159	67
Profit for the year		17	576

Underlying profit is calculated by adjusting the profit for the period for volatility that arises from different International Financial Reporting Standards (IFRS) measurement bases for liabilities and backing assets, volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS, restructuring costs, significant corporate transaction expenses, impairment of intangibles and profit or loss arising on the disposal of a subsidiary, joint venture or associate. The Directors believe that, by eliminating this volatility from the equity holder profits, they are presenting a more meaningful indication of the underlying business performance of the Group.

Consolidated balance sheet

As at 31 December 2008

		2008	2007
	Notes	£m	£m
Assets
Intangible assets	13	112	69
Deferred acquisition costs	14	892	693
Investments in associates and joint ventures	15	3,098	4,146
Investment property	16	7,738	10,646
Property, plant and equipment	17	740	870
Deferred tax assets	18	428	111
Reinsurance assets	30,31	6,076	476
Loans and receivables	19	12,069	13,056
Derivative financial assets	20	2,800	520
Investment securities	21	90,716	102,304
Other assets	22	2,259	1,754
Cash and cash equivalents	23	10,052	9,335
Total assets		136,980	143,980

Equity
Share capital	24	218	217
Share premium reserve	25	792	792
Retained earnings	26	774	776
Other reserves	27	1,623	1,497
Equity attributable to equity holders of Standard Life plc		3,407	3,282
Minority interest	28	334	391
Total equity		3,741	3,673

Liabilities
Non-participating contract liabilities	30	71,908	79,742
Participating contract liabilities	30	34,163	37,888
Deposits received from reinsurers	31	5,968	53
Third party interest in consolidated funds	28	1,603	1,501
Borrowings	33	3,227	6,118
Subordinated liabilities	34	2,204	1,908
Pension and other post retirement benefit provisions	35	42	203
Deferred income	36	382	340
Deferred tax liabilities	18	93	480
Current tax liabilities	18	174	252
Customer accounts related to banking activities and deposits by banks	37	6,991	6,080
Derivative financial liabilities	20	1,348	642
Other liabilities	38	5,136	5,100
Total liabilities		133,239	140,307

Total equity and liabilities		136,980	143,980

Approved on behalf of the Board of Directors on 12 March 2009 by the following Directors:

Gerry Grimstone, Chairman David Nish, Group Finance Director

The Notes on pages 107 to 242 are an integral part of these consolidated financial statements.

Consolidated statement of recognised income and expense

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Fair value losses on cash flow hedges		(38)	(6)
Actuarial gains/(losses) on defined benefit pension schemes	35	161	(3)
Revaluation of land and buildings	17	(58)	(26)
Net investment hedge	27	(17)	-
Exchange differences on translating foreign operations	27	479	175
Equity movements transferred to the unallocated divisible surplus	32	(236)	(11)
Equity movements attributable to third party interest in consolidated funds	28	22	-
Share of other recognised income from associates and joint ventures	15	2	-
Aggregate equity holder tax effect of items not recognised in income statement	9	(42)	-
Net income not recognised in income statement		273	129

Profit for the year		17	576
Total recognised income for the year		290	705

Attributable to:
Equity holders of Standard Life plc		373	594
Minority interest		(83)	111
		290	705

The movements in equity are summarised below:

	Notes	2008 £m	2007 £m
Equity at 1 January		3,673	3,185
Total recognised income for the year		290	705
Distributions to equity holders	12	(257)	(197)
Issue of share capital other than in cash	24	1	7
Capitalisation of share premium account	25	-	(7)
Reserves credit for employee share-based payment schemes	27	10	12
Vested employee share-based schemes	27	(2)	(5)
Change in minority interest in the year		26	(27)
Equity at 31 December		3,741	3,673

The Notes on pages 107 to 242 are an integral part of these consolidated financial statements.

Consolidated cash flow statement

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Cash flows from operating activities
(Loss)/profit before tax		(476)	620
Gain on disposal of property, plant and equipment		(38)	(27)
Depreciation of property, plant and equipment	5	10	9
Amortisation of intangible assets	5	10	8
Amortisation of deferred acquisition costs	5	165	135
Impairment losses on property, plant and equipment	17	137	16
Impairment losses on deferred acquisition costs	5	1	-
Interest cost on other borrowings		12	15
Adjustment for finance costs on banking activities		(12)	6
Finance costs		129	122
Net foreign exchange losses on investment activities		60	(41)
Share of profits from associates and joint ventures	15	(101)	(181)
Net decrease in operating assets and liabilities	40	2,966	2,731
Adjustment for non-cash movements in investment income		4	(15)
Taxation paid		(379)	(323)
Change in unallocated divisible surplus	32	(184)	(247)
Net cash flows from operating activities		2,304		2,828

Cash flows from investing activities
Purchase of property, plant and equipment	17	(285)		(233)
Proceeds from sale of property, plant and equipment		147		165
Acquisition of subsidiaries, net of cash acquired	47	(24)		-
Acquisition of investment in associates and joint ventures		(16)		(35)
Proceeds from disposal of investment in associates and joint ventures		-		23
Dividends received from associates and joint ventures		-		3
Purchase of intangible assets		(23)		(17)
Net cash flows from investing activities		(201)		(94)

Cash flows from financing activities
Proceeds from other borrowings		64		36
Repayment of other borrowings		(6)		(28)
Capital flows from minority interest and third party interest in consolidated funds		(1,047)		495
Distributions paid to minority interest		(33)		(31)
Interest paid		(138)		(134)
Ordinary dividends paid	12	(257)		(197)
Net cash flows from financing activities		(1,417)		141

Net increase in cash and cash equivalents		686		2,875
Cash and cash equivalents at the beginning of the year	23	9,120		6,194
Effects of exchange rate changes on cash and cash equivalents		145		51
Cash and cash equivalents at the end of the year	23	9,951		9,120

Supplemental disclosures on cash flow from operating activities
Interest paid		628		630
Interest received		3,666		3,581
Dividends received		1,649		1,464
Rental income received on investment properties		625		615

The Notes on pages 107 to 242 are an integral part of these consolidated financial statements.

Accounting policies

(a) Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.

The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these consolidated financial statements, unless otherwise stated.

(i) New standards, interpretations and amendments to published standards that have been adopted by the Group

The Group has adopted the amendments to IAS 39, Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. The amendments to IAS 39 introduce the possibility of reclassifications which were already permitted under US generally accepted accounting principles (GAAP) in rare circumstances. These amendments are part of a series of steps that the IASB has undertaken to respond to the credit crisis. The amendments address the desire to reduce differences between IFRSs and US GAAP. Minor updates have been made to IFRS 7 to take account of the revisions to IAS 39. The Group has not reclassified any financial instruments as a result of adoption of the updates.

IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19, Employee benefits on the amount of the surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The interpretation has been taken into consideration in determining the treatment of the surplus arising in respect of the United Kingdom defined benefit plan. Please refer to Note 35(b) - Pension and other post retirement benefit provisions.

(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Group

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods. The Group has not early adopted the standards, amendments and interpretations described below:

IFRS 8 Operating Segments (effective from 1 January 2009)

IFRS 8 will replace IAS 14 Segment reporting and proposes that the 'management approach' is adopted for reporting the financial performance of operating segments. The Group will adopt the requirements of IFRS 8 from 1 January 2009. The standard has no financial impact but is expected to have a significant impact on the Group's segmental disclosures.

Amendment to IAS 1 Presentation of financial statements (effective from 1 January 2009)

The revised standard will prohibit the presentation of items of income and expenses in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from 'owner changes in equity'. All 'non-owner changes in equity' will be required to be shown in a performance statement but there will be a choice as to whether to present only the statement of comprehensive income or both the income statement and statement of comprehensive income. The revised standard also requires that, where restatements or reclassifications of comparative information are made, a restated balance sheet must be presented as at the beginning of the comparative period. The Group will apply the revisions from 1 January 2009. The revisions are expected to have an impact on presentation within primary statements and certain of the notes to the financial statements but will not have a financial impact on the Group's financial statements.

Amendment to IAS 23 Borrowing costs (effective from 1 January 2009 - prospective application)

The publication of the revised standard has followed the joint short-term convergence project between the IASB and the US Financial Accounting Standards Board (US FASB). Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalised as part of the cost of that asset. The option of immediately expensing those borrowing costs has been removed. The Group will apply the revisions to IAS 23 from 1 January 2009, but it is not expected to have a significant impact on the Group's financial statements.

Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation (effective for annual periods beginning on or after 1 January 2009)

The amendments require certain puttable financial instruments, and certain financial instruments that impose on the Group an obligation to deliver to another party a pro rata share of net assets of the Group only on liquidation, to be classified as equity. Management have assessed that the expected impact of adoption of the amendments on the Group's financial statements will be minimal.

Amendment to IFRS 2 Share-based payment (effective for annual periods beginning on or after 1 January 2009)

The amendment addresses vesting conditions and cancellations, clarifying that vesting conditions are service conditions and performance conditions only and that other features of a share-based payment are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. The amendment also specifies that all cancellations, whether made by the Group or by other parties, should receive the same accounting treatment. Management are considering the expected impact of adoption of the amendments on the Group's financial statements.

IFRS 3 (Revised) Business combinations (applicable to business combinations occurring in accounting periods beginning on or after 1 July 2009)
The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently re-measured at fair value through profit or loss. Goodwill may be calculated based on the parent company's share of net assets or it may include goodwill related to the minority interest. All transaction costs will

be expensed. Management will give consideration to the application of the requirements of the revised standard in respect of business combinations for which the acquisition date is on or after 1 July 2009. The amendments have not yet been endorsed by the EU.

IAS 27 (Revised) Consolidated and separate financial statements (effective for annual periods beginning on or after 1 July 2009)
The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and goodwill or gains and losses will no longer be recognised. The standard also specifies the accounting when control is lost: any remaining interest in the entity is re-measured to fair value and any resulting gain or loss is recognised in the income statement. Management are considering the expected impact of adopting the revised standard on the Group's financial statements. The revisions have not yet been endorsed by the EU.

Amendment to IAS 39 Financial Instruments: Recognition and measurement on eligible hedged items (effective from accounting periods beginning on or after 1 July 2009 - retrospective application)

The amendment makes two significant changes. It prohibits both the designation of inflation as a hedgeable component of a fixed rate debt and the inclusion of time value in the one-sided hedged risk when designating options as hedges. Management will give consideration to the expected impact of adoption of the amendments on the Group's financial statements and in doing so will assess any hedging strategies involving options. The amendments have not yet been endorsed by the EU.

Improvements to IFRSs (effective from accounting periods beginning on or after 1 January 2009)

The publication amends 20 standards, basis of conclusions and guidance and the improvements include changes in presentation, recognition and measurement plus terminology and editorial changes. Management is considering the impact of adoption of the amendments on the Group's financial statements.

IFRIC 16 Hedges of a net investment in a foreign operation (effective from accounting periods beginning on or after 1 October 2008)

The interpretation clarifies, in respect of net investment hedging, that net investment hedging relates to differences in functional currency, not presentation currency, that hedging instruments may be held anywhere in the group and that the requirements of IAS 21 The effects of changes in foreign exchange rates do apply to the hedged item. Management will give consideration to the expected impact of adoption of the amendments on the Group's financial statements. IFRIC 16 has not yet been endorsed by the EU.

IFRIC 15 Agreements for construction of real estates (effective from accounting periods beginning on or after 1 January 2009)

The interpretation clarifies which standard (IAS 18 Revenue or IAS 11 Construction Contracts) should be applied to particular transactions. The new guidance may have an impact on the accounting in a number of industries as the interpretation may also be used by analogy in other circumstances to determine whether a transaction is accounted for as a sale of a good (IAS

18) or a construction contract (IAS 11). Management will give consideration to the expected impact of adoption of the amendments on the Group's financial statements. IFRIC 15 has not yet been endorsed by the EU.

IFRIC 13 Customer loyalty programmes relating to IAS 18 Revenue (effective for annual periods beginning on or after 1 July 2008)
The interpretation clarifies that where goods or services are sold together with a customer loyalty incentive, the arrangement is a multiple-element arrangement and the consideration receivable from the customer should be allocated between the components of the arrangement in proportion to their fair values. The adoption of the interpretation is not expected to have a significant impact on the Group's financial statements.

IFRIC 17 Distributions of non-cash assets to owners (effective from accounting periods beginning on or after 1 July 2009)

The interpretation provides clarification around the measurement of distributions of assets, other than cash, in respect of upward dividends. The interpretation states that a dividend payable should be recognised when appropriately authorised, it should be measured at the fair value of the net assets to be distributed, and the difference between the fair value of the dividend paid and the carrying amount of the net assets distributed should be recognised in the income statement. Management will give consideration to the expected impact of the adoption of the interpretation on the Group's financial statements. IFRIC 17 has not yet been endorsed by the EU.

(iii) Critical accounting estimates and judgement in applying accounting policies

The preparation of financial statements, in conformity with Generally Accepted Accounting Principles (GAAP), requires management to make estimates and assumptions and exercise judgements in applying the accounting policies that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the period. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas where judgements, estimates and assumptions have the most significant effect on the amounts recognised in the financial statements are as follows:

Fair value determination of financial instruments at fair value through profit or loss - refer to (q)(i) and Note 45
Fair value determination of investment property and land and buildings - refer to (l), (m) and Notes 16 and 17
Classification of insurance and investment contracts - refer to (f)
Insurance contract liabilities - refer to (u), (v), (w), (x) and Note 29
Pension and other post retirement provisions - refer to (aa) and Note 35
Impairment testing - refer to (i), (j), (o), (p) and Note 39

(b) Basis of consolidation

The Group financial statements consolidate the income statements and balance sheets of the Company and its subsidiary undertakings. Associate and joint venture undertakings are accounted for using the equity method from the date that significant influence or joint control, respectively, commences until the date this ceases.

(i) Subsidiaries

Subsidiaries are all entities, including special purpose entities, over which the Group has the power to govern the financial and operating policies. Such power, generally but not exclusively, accompanies a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group until the date that control ceases.

The Group uses the purchase method of accounting for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

Intra-group transactions, balances and unrealised gains on intra-group transactions are eliminated. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Subsidiaries' accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

Where the Group owns more than 50% of an investment vehicle, such as open-ended investment companies, unit trusts and limited partnerships, and it is consolidated, the interests of parties other than the Group in such vehicles are classified as liabilities. These are recorded in the consolidated balance sheet line 'Third party interest in consolidated funds' and any movements are recognised in the consolidated income statement. The interests of parties other than the Group in all other types of entities are recorded as minority interest in equity.

(ii) Associates and joint ventures

Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity, which is subject to joint control arising from contractual agreement.

Where the Group has a significant holding in an investment vehicle that meets the definition of an associate or joint venture and that investment in associate and joint venture backs policyholder liabilities, including the unallocated divisible surplus, that investment is accounted for at fair value through profit or loss (FVTPL) in accordance with IAS 39.

All other associates and joint ventures are accounted for using the equity method and, in this case, the Group's investment in associates and joint ventures includes goodwill, net of any impairment loss, identified on acquisition.

Investments in associates and joint ventures that are accounted for using the equity method are initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group's share of net assets of the associate and joint ventures. The Group's share of post-acquisition results of its associates and joint ventures is recognised in the income statement. The Group's share of any post-acquisition movements in reserves, where the associate recognised a gain or loss directly in equity, is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.

Where the Group's share of losses in an associate equals or exceeds its interest in an associate, including any other unsecured receivables, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations in connection with or made payments on behalf of an associate.

Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. The accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

The Group uses merger accounting principles to account for group reconstructions which are not business combinations within the scope of IFRS 3 Business Combinations. Under the principles of merger accounting, assets and liabilities transferred to a new entity are recorded in the new entity at the carrying value they were measured at by the transferor. No goodwill is recognised as a result of such transactions.

(d) Foreign currency translation

The consolidated financial statements are presented in millions pounds Sterling, which is the Group's presentation currency.

The balance sheets of Group entities that have a different functional currency than the Group's presentation currency are translated into the presentation currency at the year end exchange rate and their income statements and cash flows are translated at average exchange rates for the year. All resulting exchange differences arising are recognised in the foreign exchange reserve in equity. Where the unallocated divisible surplus changes as a result of such exchange differences which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the income statement but is recognised in equity (refer also to (h)(v)).

Foreign currency transactions are translated into the functional currency at the exchange rate prevailing at the date of the transaction. Gains and losses arising from such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss in the income statement. Translation differences on financial assets and liabilities held at amortised cost are included in foreign exchange gains or losses in the income statement.

(e) Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Segments have been separately identified after consideration of the various regulatory reporting regimes, the nature of the products sold, distribution channels, customer segments and management's view of the relative risks and rewards associated with each segment.

A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments.

(f) Classification of insurance and investment contracts

The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts. A contract is classified as insurance only if it transfers significant insurance risk. 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, excluding scenarios that lack commercial substance. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Life and pensions business contracts that are not considered to be insurance contracts are classified as investment contracts.

The Group has written insurance and investment contracts which contain discretionary participating features (e.g. with profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These additional benefits are based on the performance of with profits funds and their amount and timing is at the discretion of the Group. These contracts are referred to as participating contracts.

Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts the product class is separated into the insurance element, a non-participating investment element and a participating investment element so that each element is accounted for separately.

Healthcare and general insurance business contracts are classified as insurance contracts only if they transfer significant insurance risk.

(g) Revenue recognition

(i) Deposit accounting for non-participating investment contracts

Contributions received on non-participating investment contracts are treated as policyholder deposits and not reported as revenue in the income statement.

Deposit accounting is also applied to reinsurance contracts that do not qualify as insurance contracts under policy (f) above.

The fee income associated with non-participating investment contracts is dealt with under policy (g)(iv) below.

(ii) Premiums

Premiums received on life and pensions business insurance contracts and participating investment contracts are recognised as revenue when due for payment, except for unit linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular (and recurring) premium contracts, receivables are established at the date when payments are due.

Premiums receivable on healthcare and general insurance business insurance contracts are recognised as revenue as they are earned over the period of the policy having regard to the incidence of risk.

(iii) Net investment income

Realised and unrealised gains and losses resulting from changes in both market value and foreign exchange on investments classified as fair value through profit or loss, including investment income received (such as dividends and interest payments) are recognised in the income statement in the period in which they occur.

Changes in the fair value of derivative financial instruments that are not hedging instruments are recognised immediately in the income statement.

For loans and receivables measured at amortised cost, interest income recognised in the income statement is calculated using the effective interest rate method.

Dividend income is recognised when the right to receive payment is established.

Rental income is recognised in the income statement on a straight-line basis over the term of the lease.

(iv) Fee and commission income

All fees related to unit linked non-participating investment contracts are deemed to be associated with the provision of investment management services. Fees related to the provision of investment management services and administration services are recognised as the services are provided. Front-end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the expected life of the contract. Ongoing fees that are charged periodically, either directly or by making a deduction from invested funds, are recognised as received, which corresponds to when the services are provided.

Commissions received or receivable are recognised as revenue on the commencement or renewal date of the related policies. However, when it is probable the Group will be required to render further services during the life of the policy, the commission is deferred as a liability and is recognised as the services are provided.

Trail or renewal commission, where the Group does not have an unconditional legal right to avoid payment, is deferred at inception of the contract and an offsetting liability for contingent commission is established.

(h) Expense recognition

(i) Deposit accounting for non-participating investment contracts

Withdrawals paid out to policyholders on non-participating investment contracts are treated as a reduction to policyholder deposits and not recognised as expenses in the income statement.

Deposit accounting is also applied to reinsurance contracts that do not qualify as insurance contracts under policy (f) above.

(ii) Claims and benefits paid

Claims paid on life and pensions business insurance contracts and participating investment contracts and healthcare and general insurance business insurance contracts are recognised as expenses in the income statement.

Maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the insurance liability. Death claims and all other claims are accounted for when notified. Healthcare and general insurance claims are accounted for when there is sufficient evidence of their existence and a reasonable assessment can be made of the monetary amount involved.

Claims payable include the direct costs of settlement. Reinsurance recoveries are accounted for in the same period as the related claim.

(iii) Change in insurance and participating investment contract liabilities

The change in insurance and participating investment contract liabilities comprising the full movement in the corresponding liabilities during the period, excluding the impact of foreign exchange adjustments, is recognised in the income statement.

(iv) Change in investment contract liabilities

Investment return and related benefits credited in respect of non-participating investment contracts are recognised in the income statement as changes in investment contract liabilities.

(v) Change in unallocated divisible surplus (UDS)

The change in UDS recognised in the income statement comprises the movement in the UDS during the period. However, where movements in assets and liabilities which are attributable to participating policyholders are taken directly to equity, the change in UDS arising from these movements is not recognised in the income statement as it is also recognised in equity.

(vi) Expenses under arrangements with reinsurers

Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised as they are incurred in the income statement as expenses under arrangements with reinsurers.

(i) Impairment of non-financial assets

The carrying amounts of non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, at least at each balance sheet date. An impairment loss is recognised in the income statement for the amount by which the asset's carrying amount exceeds its recoverable amount.

The recoverable amount of an asset is the greater of its net selling price (fair value less costs to sell) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or group of units, to which the asset belongs.

(j) Goodwill and intangible assets

(i) Goodwill

Goodwill represents the excess of the cost of a business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities at the acquisition date.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated, from the acquisition date, to each of the Group's cash generating units that are expected to benefit from the business combination. The carrying amount of goodwill for each cash generating unit is reviewed when changes in circumstances or events indicate that there may be uncertainty over its carrying value, and at least annually.

Goodwill is carried at cost less any accumulated impairment losses and is included in intangible assets.

(ii) Intangible assets

Intangible assets, including internally developed software and software purchased from third parties, are recognised in the balance sheet if it is probable that the relevant future economic benefits attributable to the asset will flow to the Group and its cost can be measured reliably and are either identified as separable (i.e. capable of being separated from the entity and sold, transferred, rented, or exchanged) or they arise from contractual or other legal rights, regardless of whether those rights are transferable or separable.

Intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of the intangible asset. Impairment losses are calculated and recorded on an individual basis in a manner consistent with policy (i). Amortisation commences at the time from which an intangible asset is available for use.

(k) Deferred acquisition costs

(i) UK, Ireland and Germany - insurance and participating investment contracts

Acquisition costs incurred in issuing participating insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that is subject to the Financial Services Authority's (FSA) realistic capital regime. For other participating investment contracts incremental costs and other direct costs directly attributable to the issue of the contracts are deferred. For other insurance contracts, acquisition costs, which include both incremental acquisition costs and other indirect costs of acquiring and processing new business, are deferred.

Deferred acquisition costs are amortised in proportion to projected margins over the period the relevant contracts are expected to remain in force. After initial recognition deferred acquisition costs are reviewed by category of business and written off to the extent that they are no longer considered to be recoverable.

(ii) Canada - insurance and participating investment contracts

Implicit allowance is made for deferred acquisition costs in the Canadian Asset Liability Valuation Model (CALM). Therefore no explicit deferred acquisition costs have been recognised separately for business written by the Canadian subsidiaries.

(iii) UK, Ireland, Germany and Canada - non-participating investment contracts

Incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit linked investment contracts are deferred. Where such costs are borne by a with profits fund that is subject to the FSA's realistic capital regime deferral is limited to the level of any related deferred income.

Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.

(l) Investment property

Property held for long-term rental yields or investment gain that is not occupied by the Group is classified as investment property.

Investment property is initially recognised at cost including any directly attributable transaction costs. Subsequently investment property is measured at fair value. Fair value is determined without any deduction for transaction costs that may be incurred on sale or other disposal, unless the property is under development with a view to resale. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, alternative valuation methods such as discounted cash flow analysis or recent prices in less active markets are used. Valuations are carried out at least annually, by external independent qualified valuers. Gains or losses arising from changes in fair value are recognised in the income statement. Investment property is not depreciated.

Property located on land that is held under an operating lease is classified as investment property as long as it is held for long-term rental yields and is not occupied by the companies in the Group. The initial cost of the property is the lower of the fair value of the property and the present value of the minimum lease payments.

Rental income from investment property is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income and are also spread over the term of the lease.

(m) Property, plant and equipment

Land and buildings consists of property occupied by the Group and property that is being constructed or developed for future use as investment property. Land and buildings are recognised initially at cost and subsequently at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, alternative valuation methods such as discounted cash flow analysis or recent prices in less active markets are used. Valuations are carried out at least annually, by external independent qualified valuers less subsequent depreciation on buildings. Property occupied by the Group is valued on a vacant possession basis. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset.

Prior to the demutualisation of The Standard Life Assurance Company (SLAC), increases in the fair value of land and buildings were recognised in the unallocated divisible surplus and following the demutualisation of SLAC, all fair value increases are recognised in the revaluation reserve in equity. Where the unallocated divisible surplus changes as a result of fair value increases which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the income statement but through equity. Decreases in the fair value of land and buildings that offset previous increases in the same asset were recognised in the unallocated divisible surplus prior to the demutualisation of SLAC and are recognised in the revaluation reserve in equity post the demutualisation of SLAC. All other decreases are charged to the income statement for the period.

Owner occupied properties are depreciated on a straight-line basis over their estimated useful lives, generally between 30 and 50 years. The depreciable amount of an asset is determined by the difference between the fair value and the residual value. The residual value is the amount that would be received on disposal if the asset was already at the age and condition expected at the end of its useful life. Properties under development are not depreciated.

Equipment is stated at historical cost less depreciation. Depreciation on equipment is charged to the income statement on a straight-line basis over their estimated useful lives of between two and 15 years. The residual values and useful lives of the assets are reviewed at each balance sheet date and adjusted if appropriate.

(n) Income tax

The current tax expense is based on the taxable profits for the year, after adjustments in respect of prior years. Amounts are charged or credited to the income statement or equity as appropriate.

Deferred tax is provided using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities.

Temporary differences arising from investments in subsidiaries and associates give rise to deferred tax only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and the timing of the reversal of that difference cannot be controlled. Deferred tax is provided on unremitted earnings of subsidiaries to the extent that the temporary difference created is expected to reverse in the foreseeable future and the Group is not able to control the timing of the reversal.

Deferred tax is recognised in the income statement except when it relates to items recognised directly in the statement of recognised income and expense, in which case it is credited or charged directly to equity through the statement of recognised income and expense.

The income tax expense is determined using rates enacted or substantively enacted at the balance sheet date.

The Group's long-term businesses in the UK and Ireland are subject to tax on policyholders' investment returns on certain products and tax on equity holder profits. Policyholder tax is accounted for as an income tax and is included within the total income tax expense. Total income tax expense is analysed between equity holder tax and policyholder tax in the consolidated income statement. Equity holder tax is current and deferred tax on profits attributable to equity holders. Policyholder tax represents current and deferred tax on investment returns attributable to policyholders.

(o) Reinsurance assets

Reinsurance assets primarily include balances due for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for ascertaining the underlying policy benefits, subject to the terms of the contract.

Amounts due from reinsurers in respect of claims incurred are separately recognised in 'Other assets' and are accounted for on a basis consistent with loans and receivables (refer to policy (p)).

If a reinsurance asset is considered to be impaired, the carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the income statement. The recoverable amount is determined as the carrying amount less any impairment losses. Impairment losses are determined as the difference between the carrying amount assuming no impairment and the estimated recoverable amount.

Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for and disclosed in a manner consistent with financial instruments.

Contracts that give rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contain an element that does not transfer significant insurance risk and which can be measured separately from the insurance component. Where such elements are present they are accounted for separately with any deposit element being accounted for and disclosed in a manner consistent with financial instruments.

(p) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated as fair value through profit or loss (FVTPL). Financial assets classified as loans and receivables include deposits with credit institutions, loans secured by mortgages and loans secured on policies.

Loans and receivables are initially measured at fair value plus directly attributable transaction costs. Subsequently, they are measured at amortised cost, using the effective interest rate (EIR) method, less any impairment losses. Revenue from financial assets classified as loans and receivables is recognised in the income statement on an EIR basis.

Impairment on individual loans is determined at each reporting date. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group. This would include a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Group. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant.

If there is objective evidence that an impairment loss has been incurred on loans and receivables carried at amortised cost, the amount of the impairment loss is calculated as the difference between the present value of future cash flows, discounted at the loan's original effective rate, and the loan's current carrying value. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Subsequent recoveries are credited to the income statement.

If there is no evidence of impairment on an individual basis, a collective impairment review is undertaken whereby the assets are grouped together, on the basis of similar credit risk characteristics, in order to calculate a collective impairment loss. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

Loans and receivables which are subject to collective impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans after the minimum number of payments under the renegotiated terms have been collected. Individually significant loans whose terms have been renegotiated are subject to ongoing review to determine whether they remain impaired or past due.

(q) Investment securities and derivatives

Management determines the classification of investment securities and derivatives at initial recognition. The Group has designated its investment securities as either fair value through the profit or loss or held to maturity. All derivatives are held at fair value and where derivatives are not designated as part of a hedging relationship, changes in fair value are recorded in the income statement. Where derivatives are designated within hedging relationships, the treatment of the fair value changes depends on the nature of the hedging relationship as described below.

(i) Designation as fair value through profit or loss (FVTPL)

Financial assets and liabilities are designated at FVTPL where the asset or liability is part of a group of assets that are evaluated and managed on a fair value basis. The Group holds portfolios of equities and debt securities that are all managed and monitored, through quarterly investment reports, on a fair value basis so as to maximise returns either for policyholders or equity holders.

The Group uses derivative financial instruments including forwards, swaps, futures, and options for the purposes of matching contractual liabilities, reducing investment risks and for efficient portfolio management activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative trading purposes. The Group designates certain derivatives as part of fair value and cash flow hedge relationships under IAS 39 Financial Instruments: Recognition and Measurement. The impact of hedge accounting on the measurement of financial assets and liabilities is detailed in policy (q)(iii).

The Group recognises these assets at fair value on the trade date of the transaction. In the case of derivatives where no initial premium is paid or received the initial measurement value is nil. Directly attributable transaction costs are not included in the initial measurement value but are recognised in the income statement.

Fair values are based upon the current quoted bid price where an active market exists. Where a quoted price in an active market cannot be obtained an appropriate market consistent valuation technique (for example discounted cash flows and recent market transactions) is used to determine fair value. If a price/technique is not available to provide a reliable fair value the investment is carried at cost less a provision for impairment.

Where a valuation technique is used to establish the fair value of a financial instrument, a difference could arise between the fair value at initial recognition and the amount that would be determined at that date using the valuation technique. When unobservable market data has an impact on the valuation of derivatives, the entire initial change in fair value indicated by the valuation technique is recognised over the life of the transaction on an appropriate basis, or when the inputs become observable, or when the derivative matures or is closed out.

(ii) Designation as held-to-maturity

The Group classifies certain government bonds, held for regulatory purposes, as held-to-maturity financial assets. Held-to-maturity financial assets are recognised as assets on the trade date and initially measured at fair value plus any directly attributable transaction costs incurred on recognition. At each subsequent reporting date, the Group measures the held-to-maturity investments at amortised cost, using the effective interest rate (EIR) method, less any impairment losses identified (refer to accounting policy (p)). Revenue from held-to-maturity assets is recognised in the income statement on an EIR basis.

(iii) Hedge accounting

A hedge relationship will qualify for hedge accounting by the Group if, and only if, the following conditions are met:

• Formal hedging documentation at inception of the hedge is completed detailing the hedging instrument, hedged item, risk management objective, strategy, effectiveness testing methodology and hedge relationship

• The hedge relationship is expected to be highly effective at inception in achieving offsetting changes in fair value or cash flow attributable to the hedged risk, and

• The effectiveness of the hedge can be reliably measured and the hedge is assessed for effectiveness regularly during the reporting period for which the hedge was designated to demonstrate that it is has been highly effective

The Group discontinues hedge accounting in the following circumstances:

• It is evident from the effectiveness tests that the hedge is not, or ceased to be, highly effective

• Hedging instrument expires, or is sold, terminated or exercised, or

• Hedged item matures or is sold or repaid

Fair value hedge relationships

A fair value hedge is a hedge of the changes in fair value of a recognised asset or liability or an identified portion of such an asset or liability that is attributable to a particular risk and could impact the income statement. A fair value hedge is therefore used to hedge the exposure to variability in the fair value of financial assets and liabilities such as fixed rate debt instruments. The change in the fair value of the underlying assets or liabilities relating to the hedged risk is recognised in the income statement offsetting the change in the fair value of the hedging derivative. The change in the fair value of the hedged item in relation to the hedged risk is shown as an adjustment against the carrying value of the hedged item in the balance sheet.

If the fair value hedge ceases to meet the relevant hedging criteria, hedge accounting is discontinued and the adjustment to the carrying value of the hedged item is amortised over the remaining period to maturity and recognised in the income statement.

Cash flow hedge relationships

A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and could affect the profit or loss. A cash flow hedge is therefore used to hedge exposure to variability in cash flows such as those on variable rate assets and liabilities. Where a derivative is designated and qualifies as a cash flow hedge, the effective part of any gain or loss resulting from the change in fair value of the derivative is recognised directly in the cash flow reserve in equity. Any ineffectiveness is recognised immediately in the income statement. Amounts that have been recognised directly in the cash flow reserve are recognised in the income statement in the same period or periods during which the hedged item affects the profit or loss.

If a cash flow hedge no longer meets the relevant hedging criteria, hedge accounting is discontinued and no further changes in the fair value of the derivative are recognised in the cash flow reserve. Amounts that have already been recognised directly in the cash flow reserve are recognised in the income statement in the same period or periods during which the hedged item affects the profit or loss.

Where the forecast transaction is no longer expected to occur or the asset or liability is derecognised, the associated accumulated amounts in the cash flow reserve are recognised immediately in the income statement.

Net investment hedge relationships

A hedge of net investments in foreign operations is the hedge against the effects of changes in exchange rates in the net investment in a foreign operation, that is, the hedge of the translation gains or losses that are recognised in equity.

A hedge of net investments in foreign operations is accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. In the event of disposal of the foreign operation, gains and losses accumulated in equity are included in the income statement.

If the net investment hedge ceases to meet the relevant hedging criteria, hedge accounting is discontinued and gains and losses accumulated in equity are included in the income statement.

(iv) Embedded derivatives

Options, guarantees and other derivatives embedded in a host contract are separated and recognised as a derivative unless they are either considered closely related to the host contract, meet the definition of an insurance contract or if the host contract itself is measured at fair value with changes in fair value recognised in income.

(r) Financial guarantee contracts

The Group recognises and measures financial guarantee contracts in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Group initially recognises and measures a financial guarantee contract at its fair value. At each subsequent reporting date, the Group measures the financial guarantee contract at the higher of the initial fair value recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue and the best estimate of the expenditure required to meet the obligations under the contract at the reporting date.

(s) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and any highly liquid investments with less than three months to maturity from the date of acquisition. For the purposes of the cash flow statement cash and cash equivalents also include bank overdrafts, which are included in borrowings on the balance sheet.

(t) Equity

(i) Share capital and treasury shares

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in the share premium account. Incremental costs directly attributable to the issue of new equity instruments are shown in the share premium account as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments in a business combination are included in the cost of acquisition.

If the Company or its subsidiaries purchase any equity instruments of the Company, the consideration paid is treated as a deduction from total equity. Where such shares are sold, if the proceeds are equal to or less than the purchase price paid, the proceeds are treated as a realised profit in equity. If the proceeds exceed the purchase price, the excess over the purchase price is transferred to the share premium account.

(ii) Merger reserve

If the Company issues shares at a premium and the conditions for merger relief under Section 131 of the UK Companies Act 1985 are met, a sum equal to the difference between the issue value and nominal value is transferred to a 'merger reserve'.

(u) Insurance and investment contract liabilities

For insurance contracts and participating investment contracts IFRS 4 Insurance Contracts permits the continued application of previously applied Generally Accepted Accounting Principles (GAAP), except where a change is deemed to make the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable, and no less relevant to those needs. The Group therefore adopts UK GAAP, including the requirements of FRS 27 Life Assurance in relation to its UK-regulated with profits funds, for the measurement of its insurance and participating investment contract liabilities. As permitted under UK GAAP, the Group adopts local regulatory valuation methods, adjusted for consistency with asset measurement policies, for the measurement of liabilities under insurance contracts and participating investment contracts issued by overseas subsidiaries.

Further details on these policies and the policies for the measurement of non-participating investment contracts are given in (v), (w) and (x) below.

(v) Participating contract liabilities

Participating contract liabilities are analysed into the following components:

• Participating insurance contract liabilities

• Participating investment contract liabilities

• Unallocated divisible surplus, and

• Present value of future profits on non-participating contracts, which is treated as a deduction from the gross participating contract liabilities

The policy for measuring each component is noted below.

(i) Participating insurance and investment contract liabilities

Participating contract liabilities arising under contracts held in with profits funds falling within the scope of the Financial Services Authority's (FSA) realistic capital regime are measured on the FSA realistic basis. Under this approach the value of participating insurance and participating investment contract liabilities in each with profits fund is calculated as:

• With profits benefits reserves (WPBR) for the fund as determined under the FSA realistic basis, plus

• Future policy related liabilities (FPRL) for the fund as determined under the FSA realistic basis, less

• Any amounts due to equity holders included in FPRL, less

• The portion of future profits on non-participating contracts included in FPRL not due to equity holders, where this portion can be separately identified (see policy (v)(iii) below)

The WPBR is primarily based on the retrospective calculation of accumulated assets shares. The FPRL comprises other components such as market consistent stochastic valuation of the cost of options and guarantees.

The Group's principal with profits fund is the Heritage With Profits Fund (HWPF) operated by Standard Life Assurance Limited (SLAL). Under the Scheme of Demutualisation (the Scheme) the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the board of SLAL is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. This planned enhancement to the benefits under with profits contracts held in the HWPF is included in the FPRL under the FSA realistic basis resulting in a realistic surplus of nil. Applying the policy noted above this planned enhancement is therefore included within the measurement of participating contract liabilities.

The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund or the Proprietary Business Fund (PBF) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme such transfers are subject to certain constraints in order to protect policyholders.

Under the FSA realistic basis the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.

Applying the policy noted above:

• The value of participating insurance and participating investment contract liabilities is reduced by future expected (net positive) cash flows arising on participating contracts

• Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to adjust the value of participating insurance and participating investment contract liabilities

As the recourse cash flows emerge they are recognised as an addition to shareholder funds if positive or as a deduction from shareholder funds if negative.

In accordance with Group policy for overseas subsidiaries, the method used to determine participating contract liabilities for the Canadian business is based on Canadian accounting and regulatory valuation principles. In accordance with Canadian accounting principles, for most participating business the value of participating policy liabilities is set equal to the value of the assets set aside in a separate fund for this business, unless this is insufficient to cover guaranteed benefits, in which case a higher liability is recognised. Prior to 1 January 2007, Canadian Generally Accepted Accounting Principles (GAAP) measured the majority of assets at cost or amortised cost, therefore since the Group's policy is to measure investment securities and investment property at fair value through profit or loss (FVTPL) an adjustment was made to the Canadian GAAP liability to reflect the impact of the measurement change in the backing assets. From 1 January 2007, Canadian GAAP measures assets at FVTPL with the exception of investment property and therefore an adjustment is now only made to the Canadian GAAP liability to reflect the measurement change in investment property.

Estimates are also made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns and expectations about future economic and financial developments.

(ii) Unallocated divisible surplus (UDS)

The UDS represents the difference between assets and all other recognised liabilities in the Group's with profits funds. It is recognised as a liability.

As a result of the policies for measuring the HWPF's assets and all its other recognised liabilities, the UDS of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future recourse cash flows on non-participating contracts) and the effect of any measurement differences between the realistic balance sheet value and IFRS accounting policy value of all assets and all liabilities other than participating contract liabilities recognised in the HWPF.

(iii) Present value of future profits (PVFP) on non-participating contracts held in a with profits fund

For with profits funds falling within the scope of the FSA's realistic capital regime an amount is recognised for the PVFP on non-participating contracts where the determination of the realistic value of liabilities for with profits contracts in that with profits fund takes account directly or indirectly, of this value. The amount is recognised as a deduction from liabilities. Where this amount can be apportioned between an amount recognised in the realistic value of with profits contract liabilities and an amount recognised in the UDS, the apportioned amounts are reflected in the measurement of participating contract liabilities and UDS respectively. Otherwise it is recognised as a separate amount reflected in liabilities comprising participating contract liabilities and the UDS.

(w) Non-participating contract liabilities

(i) Non-participating insurance contracts (life and pension business)

The insurance contract liabilities for conventional business are calculated using the gross premium method. In general terms, a gross premium valuation basis is one in which the premiums brought into account are the full amounts receivable under the contract. The method includes explicit estimates of premiums, expected claims and costs of maintaining contracts. Cash flows are discounted at the valuation rate of interest determined in accordance with Financial Services Authority (FSA) requirements. The relaxations to reserving requirements for non-participating insurance contracts set out in the FSA's Policy Statement PS 06/14 (Prudential changes for insurers) were adopted during 2007. The Statement covers the introduction of prudent lapse allowances where appropriate; the inclusion (where appropriate) of negative liabilities which would have previously been recognised at a zero value and changes to the attribution of expense allowances when calculating sterling reserves.

The liability for annuity contracts is calculated by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from yields on the underlying assets.

In accordance with Group policy for overseas subsidiaries, the method used to determine the insurance contract liabilities for the Canadian business is based on Canadian accounting and regulatory valuation principles. The Canadian regulations set the value of policy liabilities equal to the value of a set of supporting assets just sufficient with reinvestment and disinvestments to meet all policy liabilities when due. Prior to 1 January 2007, Canadian Generally Accepted Accounting Principles (GAAP) measured the majority of assets at cost or amortised cost, therefore since the Group's policy is to measure investment securities and investment property at fair value through profit or loss (FVTPL) an adjustment was made to the Canadian GAAP liability to reflect the impact of the measurement change in the backing assets. From 1 January 2007, Canadian GAAP measures assets at FVTPL with the exception of investment property and therefore an adjustment is now only made to the Canadian GAAP liability to reflect the measurement change in investment property.

(ii) Non-participating insurance contracts (healthcare and general insurance business)

All healthcare and general insurance business insurance contracts are short-term contracts, generally of a duration no longer than a year. Claims outstanding comprise provisions representing the estimated ultimate cost of settling, including claims notified but not settled by the balance sheet date and claims incurred as a result of events up to the balance sheet date not reported as at that date.

A provision is made at the balance sheet date for the total expected cost of settlement of all claims incurred in respect of events up to that date, together with related claims handling expenses, less any amounts already paid. Unearned premiums represent that proportion of premiums received on in-force contracts that relate to unexpired risks at the reporting date and are recognised as a liability.

(iii) Non-participating investment contracts (life and pensions business)

Unit linked non-participating investment contract liabilities are designated as FVTPL as they are implicitly managed on a fair value basis as their value is directly linked to the market value of the underlying portfolio of assets. The fair value of a unit linked liability is equal to the value of the (funded) units allocated to the contracts. The unit value is based on the bid value of the fund assets at the reporting date before expenses of selling or buying the underlying assets.

Liabilities for non-linked investment contracts are measured at amortised cost. Amortised cost is calculated as the fair value of contributions received at the date of initial recognition, less the effect of payments such as transaction costs, plus or minus the cumulative amortisation, using the effective interest rate (EIR) method, of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the EIR.

(x) Liability adequacy test

The Group applies a liability adequacy test at each reporting date to ensure that the insurance and participating contract liabilities (less related deferred acquisition costs) are adequate in the light of the estimated future cash flows. This test is performed by comparing the carrying value of the liability and the discounted projections of future cash flows.

If a deficiency is found in the liability (i.e. the carrying value amount of its insurance liabilities is less than the future expected cash flows) that deficiency is provided for in full. The deficiency is recognised in the income statement.

(y) Borrowings

Borrowings include bank overdrafts and certificates of deposit, commercial paper, medium term notes and mortgage backed securities issued by Standard Life Bank Limited. Borrowings are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, borrowings are carried at amortised cost with any difference between the carrying value and redemption value being recognised in the income statement over the period of the borrowings on an effective interest rate basis.

(z) Subordinated liabilities

Subordinated liabilities are initially recognised at the value of proceeds received net of issue expenses. The total finance costs are charged to the income statement over the relevant term of the instrument using the effective interest rate. The carrying amount of the debt is increased by the finance cost in respect of the reporting period and reduced by payments made in respect of the debt in the period.

(aa) Pension costs and other post retirement benefits

The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee-administered funds. The pension plans are funded by payments from employees and by the relevant Group companies, determined by periodic actuarial calculations.

For defined benefit plans, the liability recognised in the balance sheet is the present value of the defined benefit obligation less the fair value of plan assets, together with adjustments for past service costs. If the fair value of plan assets exceeds the defined benefit obligation a pension surplus is only recognised to the extent that it is considered recoverable through available reductions in future contributions as the Group does not consider that there is an unconditional right to a refund. Plan assets exclude any insurance contracts or non-transferable financial instruments issued by the Group. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method whereby estimated future cash outflows are discounted using interest rates of high quality corporate bonds denominated in the currency in which the benefits will be paid of similar term as the pension liability, where appropriate these interest rates are adjusted to take account of abnormal market conditions.

Actuarial gains and losses are recognised in the statement of recognised income and expense in the period in which they occur.

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised in staff expenses when they are due.

(bb) Deferred income

Front-end fees on service contracts, including investment management service contracts, are deferred as a liability and amortised on a straight line basis to the income statement over the period services are provided.

(cc) Provisions and contingent liabilities

Provisions for restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

Contingent liabilities are disclosed if the future obligation is less than probable but greater than remote and the amount cannot be reasonably estimated.

(dd) Dividend distribution

Final dividends on share capital classified as equity instruments are recognised in equity when they have been approved by equity holders. Interim dividends on these shares are recognised in equity in the period in which they are paid.

(ee) Leases

Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases, net of any incentives received from the lessor, are charged to the income statement on a straight-line basis over the period of the lease.

Where the Group is the lessor, lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term. Initial direct costs incurred in arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.

The Group has not entered into any material finance lease arrangements as either lessor or lessee.

(ff) Employee share-based payments

The Group operates share incentive plans for all employees, share-based long-term incentive plans for senior employees and may award annual performance shares to all eligible employees when the Group's profit exceeds certain targets. Further details of the schemes are set out in Note 43. These schemes are treated as equity-settled share-based payment schemes under IFRS 2 Share-based Payment.

For equity-settled share-based payment employee transactions, the services received as compensation are measured at their fair value. This fair value is measured by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date, which is the date that the Group and the employees have a shared understanding of the terms and conditions of the award. If that award is subject to an approval process then the grant date is the date when that approval is obtained.

If the equity instruments granted vest immediately, the employees become unconditionally entitled to those equity instruments. Therefore, the Group immediately recognises the charge in respect of the services received in full in the income statement with a corresponding credit to the equity compensation reserve in equity.

If the equity instruments do not vest until the employee has fulfilled specified vesting conditions, the Group presumes that the services to be rendered by the employee as consideration for those equity instruments will be received in the future, during the period of those vesting conditions ('vesting period'). Therefore, the Group recognises the charge in respect of those services as they are rendered during the vesting period with a corresponding credit to the equity compensation reserve in equity.

At the time the equity instruments vest, the amount recognised in the equity compensation reserve in respect of those equity instruments is transferred to retained earnings.

(gg) Derecognition and offset of financial assets and liabilities

A financial asset (or a part of a group of similar financial assets) is derecognised where:

• The rights to receive cash flows from the asset have expired

• The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass through' arrangement, or

• The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

(hh) Securities lending and repurchase agreements

The Group undertakes securities lending agreements under which securities are loaned to third parties. Where they do not meet the criteria for derecognition under IAS 39: Financial Instruments: Recognition and Measurement, the loaned securities are not derecognised and continue to be classified in accordance with the Group's policy. The collateral received from securities borrowers typically consists of cash or debt securities. Non-cash collateral arising from securities lending arrangements is only recognised on the consolidated balance sheet where the relevant criteria are met. Cash collateral is reinvested and the resulting financial asset and corresponding obligation to return such collateral is recognised on the consolidated balance sheet.

Securities sold subject to repurchase agreements are not derecognised and continue to be classified in accordance with the Group's policy. These securities are only reclassified as assets pledged when the transferee has the right by contract or custom to sell or repledge the security. The counterparty liability is recognised on the consolidated balance sheet. Any difference between the sale and repurchase price is accrued over the life of the agreement as interest expense using the effective interest rate method.

(ii) Underlying profit

Underlying profit is calculated by adjusting the profit for the period for volatility that arises from different IFRS measurement bases for liabilities and backing assets, volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS, restructuring costs, significant corporate transaction expenses, impairment of intangibles and profit or loss arising on the disposal of a subsidiary, joint venture or associate. The Directors believe that, by eliminating this volatility from equity holder profit, they are presenting a more meaningful indication of the underlying business performance of the Group.

(jj) Earnings per share

Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the year less the weighted average number of shares owned by the Company and employee trusts that have not vested unconditionally in employees.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue during the year to assume the conversion of all dilutive potential ordinary shares, such as share options granted to employees.

Diluted earnings per share can also be calculated by adjusting the profit or loss for the effects of changes in income, expenses, tax and dividends that would have occurred had the dilutive potential ordinary shares been converted into ordinary shares.

Alternative earnings per share is calculated on underlying profit before non-operating items and tax. Refer to policy (ii) above for details of the adjusted items.

Notes to the Group financial statements

1. Segmental analysis

(a) Primary reporting format - business segments

The Group is managed and organised into five (2007: five) reportable business segments:

Life and pensions

Life and pensions offers a broad range of pensions, protection, savings and investment products to individual and corporate customers. Within these product classes are executive and group pension products, pooled pension funds and income protection products.

Healthcare

Healthcare primarily provides insurance cover to customers for medical expenses, accident and sickness.

Investment management

Investment management provides a range of investment products for individuals and institutional customers through a number of different investment vehicles such as mutual funds, limited partnerships and investment trusts. Asset classes offered via these vehicles include equities, bonds, cash and property. Segregated investment mandates are also provided to large investors. Investment management services are provided to other business segments.

Banking

Banking offers a range of retail mortgage and deposit products via online and telephone operations.

Other

Other includes primarily the Group Corporate Centre and the Shared Service Centre.

Segmental income statement

	Life and pensions	Healthcare	Investment management	Banking	Other	Elimination	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m	£m	£m
Revenue from external customers
Net earned premium	(3,051)	273	4	-	-	-	(2,774)
Net investment return	(14,081)	(4)	12	630	1	(89)	(13,531)
Other segment income	541	2	162	5	5	-	715
Total revenue from external customers	(16,591)	271	178	635	6	(89)	(15,590)

Inter-segment revenue	10	3	105	1	560	(679)	-

Total segment revenue	(16,581)	274	283	636	566	(768)	(15,590)

Expenses
Segment expenses	(16,230)	267	277	686	617	(759)	(15,142)
Finance costs	120	-	2	20	(4)	(9)	129

Total segment expenses	(16,110)	267	279	706	613	(768)	(15,013)

Share of profits from associates and joint ventures	98	-	(4)	-	7	-	101

Segment result for the year	(373)	7	-	(70)	(40)	-	(476)

Tax credit attributable to policyholders' returns							(334)
Tax credit attributable to equity holders' profits							(159)

Profit for the year							17

Other items included in the income statement are:
Impairment losses recognised	138	-	-	4	-	-	142
Amortisation of intangible assets	9	-	-	-	1	-	10
Amortisation of deferred acquisition costs	133	30	2	-	-	-	165
Depreciation of property, plant and equipment	4	-	-	-	6	-	10

	Life and pensions*	Healthcare	Investment management*	Banking	Other	Elimination	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m	£m	£m
Revenue from external customers
Net earned premium	3,377	264	5	-	-	-	3,646
Net investment return	5,068	-	27	699	9	-	5,803
Other segment income	498	3	153	7	3	-	664
Total revenue from external customers	8,943	267	185	706	12	-	10,113

Inter-segment revenue	54	-	102	1	453	(610)	-

Total segment revenue	8,997	267	287	707	465	(610)	10,113

Expenses
Segment expenses	8,451	269	192	689	543	(592)	9,552
Finance costs	114	-	1	25	-	(18)	122

Total segment expenses	8,565	269	193	714	543	(610)	9,674

Share of profits from associates and joint ventures	161	10	6	-	4	-	181

Segment result for the year	593	8	100	(7)	(74)	-	620

Tax expense attributable to policyholders' returns							111
Tax credit attributable to equity holders' profits							(67)

Profit for the year							576

Other items included in the income statement are:
Impairment losses recognised	16	-	-	-	-	-	16
Amortisation of intangible assets	8	-	-	-	-	-	8
Amortisation of deferred acquisition costs	99	34	2	-	-	-	135
Depreciation of property, plant and equipment	3	1	-	-	5	-	9

* There has been a reallocation of inter-segment revenue and expense between Investment management and Life and pensions from that published in the consolidated financial statements for the year ended 31 December 2007. There has been no change to each segment's result for the year.

Segmental income statement continued

Inter-segment transfers are entered into under normal commercial terms and conditions that would be available to unrelated third parties.

The Scheme of Demutualisation of The Standard Life Assurance Company (the Scheme) provides that certain recourse cash flows arising in the Heritage With Profits Fund (HWPF) on specified blocks of UK and Irish business may be transferred out of that fund and thus accrue to the ultimate benefit of equity holders in the Company. Under the Scheme such transfers are subject to certain constraints in order to protect policyholders. If the recourse cash flows result in a negative amount, then the shareholder fund will make a transfer to the HWPF of at least that negative amount. The Scheme also provides for additional expenses to be charged by the Proprietary Business Fund (PBF) to the HWPF in respect of German branch business.

As explained in accounting policy (v) the expected future value of the defined cash flows on UK and Irish participating contracts is recognised as a reduction in the measurement of participating contract liabilities or in the unallocated divisible surplus. As these recourse cash flows arise they are no longer included in the measurement of participating contract liabilities or the unallocated divisible surplus and thus contribute to equity holder profit.

As explained in accounting policy (v) the expected future value of the recourse cash flows on UK and Irish non-participating contracts is not recognised either in the measurement of non-participating liabilities or in the unallocated divisible surplus. For regulatory reporting purposes the realistic valuation includes an adjustment to reflect the expected future value of cash flows due to equity holders. This is excluded from the International Financial Reporting Standards (IFRS) valuation. As these defined cash flows arise they contribute to equity holder profit.

As explained in accounting policy (v) the expected future value of the additional expenses to be charged on German unitised with profits contracts is recognised as a liability within the unallocated divisible surplus. As these additional expenses are charged they are no longer included in the measurement of the unallocated divisible surplus and thus contribute to equity holder profit.

In the year ended 31 December 2008 the recourse cash flows resulted in a positive amount (2007: positive), the transfer of which out of the HWPF was not subject to any constraint.

The life and pensions segment profit comprises the following:

	2008	2007
	£m	£m
Recourse cash flows arising on UK and Irish unitised contracts	243	378
Recourse cash flows arising on UK and Irish non-unitised contracts	124	296
Additional expenses charged on German unitised with profits contracts	39	59
Transfer out of HWPF	406	733
Life and pensions operations outside the HWPF	(779)	(140)
Life and pensions segment result for the year	(373)	593

The life and pensions segment result is shown before deduction of tax attributable to policyholders' returns of (£334m) (2007: £111m).

(ii) Segmental balance sheet

	Life and pensions	Healthcare	Investment management	Banking	Other	Elimination	Total
At 31 December 2008	£m	£m	£m	£m	£m	£m	£m
Assets
Segment assets	121,660	268	458	11,441	798	(1,296)	133,329
Investments in associates and joint ventures	2,895	3	15	-	185	-	3,098
Total segment assets	124,555	271	473	11,441	983	(1,296)	136,427

Unallocated assets							553

Total assets							136,980

Liabilities
Segment liabilities	122,263	174	370	11,261	200	(1,296)	132,972
Total segment liabilities	122,263	174	370	11,261	200	(1,296)	132,972

Unallocated liabilities							267

Total liabilities							133,239

Equity
Share capital and reserves							3,407
Minority interest							334
Total equity							3,741

Total equity and liabilities							136,980

Capital expenditure incurred during the year on:
Intangible assets	11	6	-	-	9	-	26
Deferred acquisition costs	275	31	-	-	-	-	306
Property, plant and equipment	270	-	2	-	1	-	273

Segmental balance sheet continued

	Life and pensions	Healthcare	Investment management	Banking	Other	Elimination	Total
At 31 December 2007	£m	£m	£m	£m	£m	£m	£m
Assets
Segment assets	126,460	186	313	13,226	435	(977)	139,643
Investments in associates and joint ventures	3,740	106	45	-	255	-	4,146
Total segment assets	130,200	292	358	13,226	690	(977)	143,789

Unallocated assets							191

Total assets							143,980

Liabilities
Segment liabilities	127,016	203	210	12,917	204	(975)	139,575
Total segment liabilities	127,016	203	210	12,917	204	(975)	139,575

Unallocated liabilities							732

Total liabilities							140,307

Equity
Share capital and reserves							3,282
Minority interest							391
Total equity							3,673

Total equity and liabilities							143,980

Capital expenditure incurred during the year on:
Intangible assets	10	6	-	1	-	-	17
Deferred acquisition costs	331	34	-	-	-	-	365
Property, plant and equipment	216	-	-	-	17	-	233

(b) Secondary reporting format - geographical segments

The geographical segments are the United Kingdom, Canada and international operations, which includes all other geographic regions.

Revenues are allocated based on the country in which the contracts are issued, or products are sold. Total assets and capital expenditure are allocated based on where the contracts or products to which they relate are issued or sold.

	Segment revenue from external customers	Segment assets	Capital expenditure on intangible assets, deferred acquisition costs and property, plant and equipment
	£m	£m	£m
At 31 December 2008
United Kingdom	(15,741)	111,060	481
Canada	(502)	16,306	18
International	653	9,061	106
Unallocated items	-	553	-
Total	(15,590)	136,980	605

At 31 December 2007
United Kingdom	7,926	121,588	485
Canada	1,453	15,849	15
International	734	6,352	115
Unallocated items	-	191	-
Total	10,113	143,980	615

2. Net investment return

	2008	2007
	£m	£m
Interest and similar income
Cash and cash equivalents	616	453
Loans and receivables	761	778
Held to maturity debt securities	-	3
Other	1	1
	1,378	1,235
	-
Dividend income	1,662	1,463

Gains/(losses) on financial instruments
Equity securities	(17,331)	1,810
Debt securities	1,477	1,726
Derivative financial instruments	1,087	(444)
	(14,767)	3,092

Impairment losses on financial assets
Loans and receivables	(5)	-
Interest income	4	-
	(1)	-

Foreign exchange gains and losses on instruments other than at fair value through profit or loss	(60)	41

Net income from investment properties
Rental income	599	632
Net fair value losses on investment properties	(2,342)	(660)
	(1,743)	(28)
Total net investment return	(13,531)	5,803

3. Fee and commission income

	2008	2007
	£m	£m
Fee income on investment contracts at fair value	476	447
Fee income from third party funds under management	126	132
Reinsurance commission income	2	2
Other fee and commission income	18	12
Total fee and commission income	622	593

4. Expenses under arrangements with reinsurers

	2008	2007
	£m	£m
Interest payable on deposit from reinsurers	276	-
Premium Adjustments	(184)	-
Expenses under arrangements with reinsurers	92	-

During 2008, Standard Life Assurance Limited (SLAL) entered into a reinsurance treaty which transferred the longevity and investment risk related to a portfolio of annuities to the reinsurer, for which an initial premium was payable to the reinsurer. In order to limit counterparty credit exposure, the reinsurer was then required to deposit back an amount equal to the initial premium. Interest is payable on the deposit at a floating rate. In respect of this arrangement, SLAL now maintains a ring fenced pool of assets. The value of these assets is periodically compared to the amount of the required reserves for the reinsured liabilities. Any excess or shortfall in the value of the assets is then paid to or made up by the reinsurer by way of repayment of deposit or the making of a further deposit when required under the reinsurance treaty. The treaty also contains the requirement for the payment or receipt of Premium Adjustments, a term defined in the treaty, to ensure that the investment risk on the ring fenced pool of assets falls on the reinsurer. They are calculated periodically under the treaty as the difference between the value of the ring fenced assets and the deposit amount. If the Premium Adjustment is payable to the reinsurer, the reinsurer is required to deposit a corresponding amount into the deposit. If the Premium Adjustment is payable to SLAL a corresponding amount is repaid from the deposit.

As set out in the table above, expenses under arrangements with reinsurers include:

Interest on the deposit payable to the reinsurer using the effective interest method
Premium Adjustments, as defined in the reinsurance treaty, payable or receivable in the year

Accrued interest and accrued Premium Adjustments are presented in 'Deposits received from reinsurers' in the balance sheet.

5. Other administrative expenses

		2008	2007
	Notes	£m	£m
Interest expense on customer accounts related to banking activities and deposits by banks		320	265
Interest expense on debt securities issued and mortgage backed floating notes		296	372
Other interest expense		23	26
		639	663

Commission expenses		452	503
Staff costs and other employee related costs	6	606	566
Operating lease rentals		11	3
Auditors' remuneration	7	7	6
Other administrative expenses		660	722
Depreciation of property, plant and equipment	17	10	9
Impairment losses on property, plant and equipment	17	137	16
Amortisation of intangible assets	13	10	8
		2,532	2,496
Acquisition costs deferred during the year	14	(307)	(365)
Amortisation of deferred acquisition costs	14	165	135
Impairment losses on deferred acquisition costs	14	1	-
Total other administrative expenses		2,391	2,266

Interest expense of £129m (2007: £122m) was incurred in respect of subordinated liabilities and is reported in finance costs. For the year ended 31 December 2008 total interest expense is therefore £768m (2007: £785m).

Other administrative expenses include £102m (2007: £nil) related to an expense incurred in respect of a unit linked fund, the Pension Sterling Fund. In January 2009 the value of units in that Fund was reduced to reflect reductions in the market value of certain instruments held by the Fund. In February 2009, in order to put customers invested in that Fund back into the position they would have been before the valuation adjustment, the Group injected cash into the Fund. As the circumstances that led to the cash injection had been in existence prior to the year end, the cost has been accrued within other administrative expenses for the year ended 31 December 2008.

6. Staff costs and other employee related costs

		2008	2007
	Notes	£m	£m
The aggregate remuneration payable in respect of employees was:
Wages and salaries		481	462
Social security costs		50	48
Other pension costs	35
Defined benefit scheme		56	40
Defined contribution scheme		11	7
Employee share-based payments	43	8	9
Total staff costs and other employee related costs		606	566

	2008	2007
The average number of staff employed by the Group during the year was:
United Kingdom	7,250	7,278
Canada	1,944	2,030
International	765	690
Total average number of staff employed	9,959	9,998
Life and pensions	6,245	5,927
Healthcare	734	900
Banking	366	581
Investment management	762	720
Group Corporate Centre	396	216
Shared Service Centre	1,456	1,654
Total average number of staff employed	9,959	9,998

The information required to be disclosed under the Companies Act 1985 in respect of Directors' remuneration is provided in the Directors' remuneration report on pages 88 to 99.

7. Auditors' remuneration

	2008	2007
	£m	£m
Fees payable to the Company's auditor for the audit of the Company's individual and consolidated financial statements	0.4	0.5

Fees payable to the Company's auditor for other services:
The audit of the Company's subsidiaries pursuant to legislation	4.3	3.7
Other services pursuant to legislation	0.5	0.5
Tax advisory services	0.9	0.5
Other services	0.7	1.0
Total auditors' remuneration	6.8	6.2

In addition to the amounts included above, the auditors also provided financial due diligence and taxation advisory services amounting to £0.1m in relation to the acquisition of Vebnet (Holdings) plc, and these costs have been included in the acquisition costs shown in Note 47 (2007: £1.9m was included in the restructuring and corporate transaction expenses shown in Note 8 in respect of the proposed acquisition of Resolution plc).

Fees in respect of other services performed mainly related to accounting and regulatory advice.

During the year the Group incurred audit fees in respect of the UK staff pension scheme of £43,973 (2007: £27,300).

8. Restructuring and corporate transaction expenses

Restructuring costs incurred during the year of £73m (2007: £31m) include £24m of costs associated with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc (see below). In addition, restructuring costs include £46m of expenses in relation to the Group's Continuous Improvement Programme (CIP), mainly in relation to consultancy costs and process improvement projects (2007: £9m) and other restructuring costs of £3m (2007: £4m). The restructuring cost for the year ended 31 December 2007 also includes £18m relating to the proposed acquisition of Resolution plc.

Of the total restructuring costs of £73m, £72m (2007: £31m) is adjusted when determining underlying profit for the year, with the remaining £1m (2007: nil) relating to CIP expenses incurred by the Heritage With Profits Fund.

On 30 April 2008 Standard Life Investments (Global Liquidity Funds) plc restructured one of its sub-funds, changing the pricing structure from an amortised cost to marked-to-market basis. The total costs to the Group associated with the restructuring of the sub-fund at the date of the transaction were £39m, of which £24m are restructuring costs and £15m is recognised in net investment return since it reflects the difference between the amortised cost and marked-to-market value of assets brought directly on to the Group balance sheet.

During the year ended 31 December 2007 the Company had issued a guarantee to Standard Life Investments (Global Liquidity Funds) plc to cover the difference between amortised cost and marked-to-market value of the underlying assets of two sub-funds, should there be a need to sell assets below amortised cost to meet investor withdrawals. The guarantee was for a maximum of £60m and a provision of £10m was recognised in the year ended 31 December 2007. As a result of the restructuring, the guarantee was replaced by a revised agreement in respect of the other sub-fund with a maximum guarantee of £5m (refer to Note 41 (d)).

9. Tax (credit)/expense

The tax (credit)/expense is attributed as follows:

	2008	2007
	£m	£m
Tax (credit)/expense attributable to policyholders' returns	(334)	111
Tax credit attributable to equity holders' profits	(159)	(67)
	(493)	44

The share of tax of associates and joint ventures is £3m (2007: £4m) and is included above the line '(Loss)/profit before tax' in the consolidated income statement in 'Share of profits from associates and joint ventures'.

(a) Current year tax (credit)/expense

		2008	2007
	Notes	£m	£m
Current tax:
United Kingdom		253	295
Double tax relief		(1)	(41)
Canada and international		19	22
Adjustment to tax credit in respect of prior years		(21)	(3)
Total current tax		250	273

Deferred tax:
Deferred tax credit arising from the current period	18	(743)	(229)
Total deferred tax		(743)	(229)

Total tax (credit)/expense		(493)	44

Attributable to equity holders' profits		(159)	(67)

Unrecognised tax losses of previous years were used to reduce current and deferred tax expenses by £10m and £21m respectively (2007: £nil and £16m current and deferred tax respectively).

Deferred tax has not been provided on retained earnings of overseas subsidiaries totalling £156m (2007: £199m).

(b) Tax expensed to equity

	2008	2007
	£m	£m
Current tax	1	-
Deferred tax	41	-
Aggregate tax effect of items debited directly to equity	42	-

	2008	2007
	£m	£m
(Loss)/profit before tax	(476)	620
Tax at 28.5% (2007: 30%)	(136)	186
Policyholder tax (net of tax at UK standard rate)	(239)	78
Permanent differences	25	(42)
Temporary timing differences	2	2
Non-taxable transfer to equity holders	(105)	(202)
Different tax rates	16	18
Adjustment to current tax expense in respect of prior years	(21)	(3)
Recognition of previously unrecognised tax credit	(25)	(4)
Deferred tax not recognised	6	14
Other	(1)	10
Reversal of write down of deferred tax assets	(4)	(13)
Adjustment to deferred tax expense in respect of prior years	(11)	-
Total tax (credit)/expense for the year	(493)	44

10. Volatility arising on different asset and liability valuation bases

Group underlying profit has been adjusted in respect of volatility that arises from different IFRS measurement bases for liabilities and backing assets. The adjustment is analysed as follows:

	2008	2007
	£m	£m
Measurement of investment contract liabilities and backing assets	-	163
Measurement of subordinated liabilities and backing assets	47	100
Derivative volatility	94	39
	141	302

Derivative volatility comprises amounts in respect of volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IAS 39 Financial Instruments: Recognition and Measurement.

11. Earnings per share

(a) Basic earnings per share

Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally to employees.

	2008	2007
Profit attributable to equity holders of Standard Life plc (£m)	100	465
Weighted average number of ordinary shares in issue (millions)	2,176	2,138
Basic earnings per share (pence per share)	4.6	21.7

(b) Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares - share awards and share options awarded to employees.

For share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of shares that would have been issued assuming the exercise of the share options. Further details on the share awards and share options are set out in Note 43.

As part of the offer on the flotation of the Company, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who held such shares for a continuous period of one year were eligible to receive, at the end of that one year period, one bonus share for every 20 shares retained. The number of bonus shares included as dilutive potential shares for the period 10 July 2006 to 9 July 2007 is based on the actual number issued on 10 July 2007.

	2008	2007
Profit attributable to equity holders of Standard Life plc (£m)	100	465
Weighted average number of ordinary shares for diluted earnings per share (millions)	2,180	2,177
Diluted earnings per share (pence per share)	4.6	21.4

The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 4 million (2007: 3 million). The effect of these dilutive potential ordinary shares did not impact the profit attributable to equity holders of the Company. In 2007, the dilutive effect of the bonus shares included in the weighted average number of ordinary shares above was 36 million.

Earnings per share is also calculated based on the underlying profit before tax and certain non-operating items after tax as well as on the profit attributable to equity holders. The Directors believe that earnings per share based on underlying profit provides a better indication of operating performance.

	2008	2008	2007	2007
	£m	Per share p	£m	Per share p
Underlying profit before tax attributable to equity holders	71	3.3	825	38.6
Volatility arising on different asset and liability valuation bases	(141)	(6.5)	(302)	(14.1)
Restructuring and corporate transaction expenses	(72)	(3.3)	(31)	(1.4)
Profit on part disposal of associate	-	-	17	0.7
(Loss)/profit before tax attributable to equity holders' profits	(142)	(6.5)	509	23.8

Tax credit attributable to:
Underlying profit	100	4.6	11	0.5
Adjusted items	59	2.7	56	2.6
Loss/(profit) attributable to minority interest	83	3.8	(111)	(5.2)
Profit attributable to equity holders of Standard Life plc	100	4.6	465	21.7

12. Dividends

The Company paid a final dividend of 7.70 pence per share (final 2006: 5.4 pence) totalling £168m in respect of the year ended 31 December 2007 on 30 May 2008 (final 2006: £114m) and an interim dividend of 4.07 pence per share (interim 2007: 3.80 pence) totalling £89m (interim 2007: £83m) in respect of the year ended 31 December 2008 on 28 November 2008.

Subsequent to 31 December 2008, the Directors have proposed a final dividend for the year ended 31 December 2008 of 7.70 pence per ordinary share, £168m in total. The dividend will be paid on 29 May 2009, subject to approval at the Annual General Meeting on 15 May 2009. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2009.

13. Intangible assets

		Internally developed software	Other acquired intangible assets	Goodwill	Total
	Notes	£m	£m	£m	£m
Gross amount
At 1 January 2007		57	-	16	73
Additions - internal development		17	-	-	17
Foreign exchange adjustment		1	-	-	1
At 31 December 2007		75	-	16	91
Additions - internal development		18	-	-	18
Additions - acquisitions		-	8	-	8
Additions - business combinations	47	7	-	19	26
Foreign exchange adjustment		3	-	-	3
At 31 December 2008		103	8	35	146

Accumulated amortisation
At 1 January 2007		(13)	-	-	(13)
Amortisation charge for the year	5	(8)	-	-	(8)
Other		(1)	-	-	(1)
At 31 December 2007		(22)	-	-	(22)
Amortisation charge for the year	5	(9)	(1)	-	(10)
Other		(2)	-	-	(2)
At 31 December 2008		(33)	(1)	-	(34)

Carrying amount
At 31 December 2007		53	-	16	69
At 31 December 2008		70	7	35	112