IFRS & EEV Restatement 311204

Legal & General Group PLC 24 May 2005 Part B Legal & General Group Plc IFRS financial information ------------------------------------------------------------------------------- Index Consolidated Summary Income Statement (operating profit basis)* 1 Notes to the Consolidated Summary Income Statement (operating profit basis)* 2 Consolidated Income Statement 3 Consolidated Balance Sheet 4 Statement of Recognised Income and Expense 5 Notes to the IFRS financial information 6 Reconciliation of Income Statement for the year ended 31 December 2004 6 Reconciliation of the Balance Sheet as at 31 December 2004 7 Analysis of adjustments to the Balance Sheet as at 31 December 2004 8 Notes to the reconciliation of the Balance Sheet and Income Statement 9 Basis of preparation 13 Accounting policies 14 Opening Consolidated Balance Sheet 21 Reconciliation of the Balance Sheet as at 1 January 2004 21 Analysis of adjustments to the Balance Sheet as at 1 January 2004 22 Auditors' report 23 * The summary income statement and corresponding notes do not form part of the audited IFRS financial information for 31 December 2004. =============================================================================== Part B P1 Legal & General Group Plc Consolidated Summary Income Statement Year ended 31 December 2004 ------------------------------------------------------------------------------- Notes IFRS As reported UK GAAP (MSSB) Â£m Â£m Profit from continuing operations Life and pensions 1 488 466 Institutional fund management 69 69 General insurance 32 32 Other operational income 22 34 ------ ------ Operating profit from continuing operations 611 601 Profit from discontinuing operations 7 7 ------ ------ Operating profit 618 608 Variation from longer term investment return 37 32 Change in equalisation provision 0 (7) Shareholder retained capital (SRC) movement 2 (20) 13 Property income attributable to minorities 32 - ------ ------ Profit before tax 667 646 Tax (184) (182) ------ ------ Profit for the period 483 464 Minority interests 3 (32) - ------ ------ Profit attributable to equity holders 451 464 ====== ====== Basic earnings per share p p Based on operating profit after tax 6.79 6.75 Based on profit for the year 6.96 7.15 Diluted earnings per share Based on operating profit after tax 6.70 6.61 Based on profit for the year 6.87 7.00 =============================================================================== This presentation of the Group's profit for the period summarises the Group's results included in the Consolidated Income Statement shown on page 3 of this announcement. The operating profit represents the Directors' view of the underlying performance of the Group on an IFRS basis. For life and pensions and general insurance business, the operating profit is based on a long term investment return. This summary and the corresponding notes on page 2 do not form part of the audited IFRS financial information for 31 December 2004. In this IFRS Consolidated Summary Income Statement only the element of total income tax attributable to equity holders' profits is shown explicitly as income tax, the balance being included within expenses. Total tax is included in the Consolidated Income Statement on page 3 and further information on the apportionment of income tax is contained within the accounting policy for income taxes on page 18. =============================================================================== Part B P2 Legal & General Group Plc Notes to the Consolidated Summary Income Statement Year ended 31 December 2004 ------------------------------------------------------------------------------- 1. Gross insurance premiums and operating profit As As reported reported UK GAAP UK GAAP IFRS IFRS (MSSB) (MSSB) Premiums Operating Premiums Operating written profit written profit Â£m Â£m Â£m Â£m Life and pensions - With-profits business 686 67 1,414 67 - Non profit business 2,010 324 3,931 324 ------ ------ ------- ------ UK 2,696 391 5,345 391 USA 308 58 294 55 Netherlands 182 39 191 20 France 204 0 213 0 ------ ------ ------- ------ 3,390 488 6,043 466 ====== ====== ======= ====== UK life and pension premiums written have decreased as investment contract premiums are excluded from the income statement. 2. Change in SRC As reported UK GAAP IFRS (MSSB) Â£m Â£m Investment income 60 60 Interest expense and charges (2) (2) Realised investment gains 100 100 Unrealised investment appreciation 51 51 ------ ------ Investment return on SRC 209 209 Net capital released from non-profit business 95 128 Distribution of operating profit from non-profit business (324) (324) ------ ------ SRC movement before equity holder tax included in the income statement (20) 13 ====== ===== SRC at 1 January 2,214 2,212 SRC movement before equity holder tax included in the income statement (20) 13 Equity holder tax credit 19 8 ----- ------ SRC movement after equity holder tax (1) 21 SRC movement included in the statement of recognised income and expenditure (17) - ------ ------ SRC at end of year 2,196 2,233 ====== ====== 3. Minority interests Minority interests represent the share of profit relating to investments included in the consolidated balance sheet that are owned by third parties. =============================================================================== Part B P3 Legal & General Group Plc Consolidated Income Statement Year ended 31 December 2004 ------------------------------------------------------------------------------- IFRS Â£m Revenue Gross written premiums 3,714 Outward reinsurance premiums (356) Net change in provision for unearned premiums (9) ------ Net earned premiums 3,349 Fees from fund management and investment contracts 296 Net investment return 13,590 Other operating income 4 ------ Total revenue 17,239 ====== Expenses Claims and change in insurance liabilities 4,298 Reinsurance recoveries (17) Change in provisions for investment contract liabilities 9,789 Acquisition costs 837 Finance costs 114 Other expenses 482 Transfers to the unallocated divisible surplus 964 ------ Total expenses 16,467 ====== Profit before income tax 772 Income tax attributable to policyholder returns (116) ------ Profit before income tax from continuing operations 656 ##### Total income tax expense :(298): Less income tax attributable to policyholder returns : 116 : ##### Income tax attributable to the equity holders of the company (182) ------ Profit for the year from continuing operations 474 Profit for the year from discontinuing operations 9 ------ Profit on ordinary activities after income tax 483 Minority interests (32) ------ Profit on ordinary activities after income tax attributable to equity holders of the company 451 ===== Dividend distributions to equity holders of the company during the year 321 ===== p Earnings per share for profit attributable to the equity holders of the company during the year Basic 6.96 Diluted 6.87 =============================================================================== Part B P4 Legal & General Group Plc Consolidated Balance Sheet As at 31 December 2004 ------------------------------------------------------------------------------- As reported UK GAAP IFRS (MSSB) Â£m Â£m Assets Purchased interests in long term business 24 24 Property, plant and equipment 23 23 Investment property 4,903 3,741 Financial investments 139,866 34,595 Assets held to cover linked liabilities - 108,297 Reinsurers' share of contract provisions 2,977 2,977 Deferred acquisition costs 1,072 800 Income tax recoverable 20 - Other debtors 996 1,111 Non-current assets held for sale 733 - Cash and cash equivalents 2,992 67 ------ ------ Total assets 153,606 151,635 ======= ======= Equity Share capital 163 163 Share premium account 907 907 Treasury shares (27) (13) Other reserves 34 - Retained earnings 2,594 2,319 ------ ------ Equity attributable to shareholders 3,671 3,376 Minority interests 214 - ------ ------ Total equity 3,885 3,376 ======= ======= Liabilities Technical provisions (including linked liabilities) - 139,534 Participating insurance contracts 12,388 - Participating investment contracts 6,863 - Unallocated divisible surplus 1,559 2,456 Non-participating value of in-force business (434) - ------ Participating contract liabilities 20,376 ######## Non-participating insurance contracts : 20,912: - Non-participating investment contracts :103,281: - ######## Non-participating contract liabilities 124,193 - Borrowings 1,846 1,788 Provisions 503 - Deferred income 238 - Deferred tax liabilities 295 206 Income tax liabilities 79 123 Other creditors 982 4,152 Net asset value attributable to unitholders 575 - Non-current liabilities held for sale 634 - ------ ------ Total liabilities 149,721 148,259 ======= ======= Total equity and liabilities 153,606 151,635 =============================================================================== Part B P5 Legal & General Group Plc Statement of Recognised Income and Expense Year ended 31 December 2004 ------------------------------------------------------------------------------- IFRS Â£m Fair value losses on cash flow hedges (4) Exchange differences on translation of foreign operations (9) Actuarial losses on defined benefit pension scheme (43) Actuarial losses on defined benefit pension scheme transferred to unallocated divisible surplus 17 Net change in available-for-sale investments (2) ------ Net expense recognised directly in equity (41) Profit for the year after income tax 483 Dividends (321) ------ Total recognised income and expense for the year 121 Minority interests (32) ------ Attributable to equity holders of the company 89 =============================================================================== Part B P6 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Reconciliation of Income Statement for the year ended 31 December 2004 Profit after tax and minority Notes Revenue Expenses interests Â£m Â£m Â£m As reported under UK GAAP (MSSB) 35,295 34,581 464 Investments valuation (ii) 30 10 10 Accounting for investment contracts (iii) (38) (35) (18) Claims equalisation provision (v) - (7) 5 Accounting for pension obligations (vi) - 9 (1) Convertible debt accounting (vii) 5 13 (7) Consolidation of additional entities (viii) 45 17 32 Investment contracts - deposit accounting (ix) (17,911) (17,911) - Other adjustments (x) (48) (78) (2) Amounts classified as discontinuing (139) (132) - ------ ------ ------ As reported under IFRS 17,239 16,467 483 ====== ====== Minority interests (32) ------ Attributed to equity holders 451 =============================================================================== Part B P7 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Reconciliation of the Balance Sheet as at 31 December 2004 As reported UK GAAP Adjust- (MSSB) ments IFRS Â£m Â£m Â£m Assets Investment property 3,741 1,162 4,903 Financial investments 34,595 105,271 139,866 Assets held to cover linked liabilities 108,297 (108,297) - Reinsurers' share of contract provisions 2,977 - 2,977 Deferred acquisition costs 800 272 1,072 Income tax recoverable - 20 20 Other assets 1,158 (115) 1,043 Non-current assets held for sale - 733 733 Cash and cash equivalents 67 2,925 2,992 ------- ------ ------ 151,635 1,971 153,606 ======= ====== ======= Equity and liabilities Shareholders' equity 3,376 295 3,671 Minority interests - 214 214 Technical provisions 139,534 (139,534) - Participating insurance contracts - 12,388 12,388 Participating investment contracts - 6,863 6,863 Unallocated divisible surplus 2,456 (897) 1,559 Non-participating value of in-force business - (434) (434) Non-participating insurance contracts - 20,912 20,912 Non-participating investment contracts - 103,281 103,281 Borrowings 1,788 58 1,846 Provisions - 503 503 Deferred income - 238 238 Deferred tax liabilities 206 88 294 Income tax liabilities 123 (44) 79 Other creditors 4,152 (3,169) 983 Net asset value attributable to unitholders - 575 575 Non-current liabilities held for sale - 634 634 ------ ------ ------ 151,635 1,971 153,606 =============================================================================== Part B P8 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Analysis of adjustments to the Balance Sheet as at 31 December 2004 Accounting for Dividend Investment investment recognition valuation contracts (Note i) (Note ii) (Note iii) Â£m Â£m Â£m Assets Investment property - - - Financial investments - (51) - Assets held to cover linked liabilities - - - Reinsurers' share of contract provisions - - - Deferred acquisition costs - - 214 Income tax recoverable - - - Other assets - (12) - Non-current assets held for sale - - - Cash and cash equivalents - - - ------------------------------------------------------------------------------- - (63) 214 =============================================================================== Equity and liabilities Shareholders' equity 224 44 44 Minority interests - - - Technical provisions - - - Participating insurance contracts - 12 - Participating investment contracts - - - Unallocated divisible surplus - (88) 57 Non-participating value of in-force business - - - Non-participating insurance contracts - (25) - Non-participating investment contracts - (30) (158) Borrowings - - - Provisions - - - Deferred income - - 238 Deferred tax liabilities - 26 33 Income tax liabilities - - - Other creditors (224) (2) - Net asset value attributable to unitholders - - - Non-current liabilities held for sale - - - ------------------------------------------------------------------------------- - (63) 214 =============================================================================== Accounting Participating Claims for contract equalisation pension liabilities provision obligations (Note iv) (Note v) (Note vi) Â£m Â£m Â£m Assets Investment property - - - Financial investments - - - Assets held to cover linked liabilities - - - Reinsurers' share of contract provisions - - - Deferred acquisition costs (14) - - Income tax recoverable - - - Other assets - - - Non-current assets held for sale - - - Cash and cash equivalents - - - ------------------------------------------------------------------------------- (14) - - =============================================================================== Equity and liabilities Shareholders' equity - 36 (67) Minority interests - - - Technical provisions - - - Participating insurance contracts 1,026 - - Participating investment contracts 218 - - Unallocated divisible surplus (824) - (44) Non-participating value of in-force business (434) - - Non-participating insurance contracts - (53) (344) Non-participating investment contracts - - - Borrowings - - - Provisions - - 503 Deferred income - - - Deferred tax liabilities - 16 (48) Income tax liabilities - - - Other creditors - 1 - Net asset value attributable to unitholders - - - Non-current liabilities held for sale - - - ------------------------------------------------------------------------------- (14) - - =============================================================================== Consolidation Convertible of debt additional Other accounting entities adjustments (Note vii) (Note viii) (Note x) Â£m Â£m Â£m Assets Investment property - 154 1,008 Financial investments - 501 104,821 Assets held to cover linked liabilities - - (108,297) Reinsurers' share of contract provisions - - - Deferred acquisition costs - - 72 Income tax recoverable - - 20 Other assets - 42 (145) Non-current assets held for sale - 733 - Cash and cash equivalents - 102 2,823 ------------------------------------------------------------------------------- - 1,532 302 =============================================================================== Equity and liabilities Shareholders' equity 15 (14) 13 Minority interests - 206 8 Technical provisions - - (139,534) Participating insurance contracts - - 11,350 Participating investment contracts - - 6,645 Unallocated divisible surplus - - 2 Non-participating value of in-force business - - - Non-participating insurance contracts - - 21,334 Non-participating investment contracts - - 103,469 Borrowings (27) 67 18 Provisions - - - Deferred income - - - Deferred tax liabilities 8 - 53 Income tax liabilities - - (44) Other creditors 4 64 (3,012) Net asset value attributable to unitholders - 575 - Non-current liabilities held for sale - 634 - ------------------------------------------------------------------------------- - 1,532 302 =============================================================================== Total adjustments Â£m Assets Investment property 1,162 Financial investments 105,271 Assets held to cover linked liabilities (108,297) Reinsurers' share of contract provisions - Deferred acquisition costs 272 Income tax recoverable 20 Other assets (115) Non-current assets held for sale 733 Cash and cash equivalents 2,925 --------------------------------------------------- 1,971 =================================================== Equity and liabilities Shareholders' equity 295 Minority interests 214 Technical provisions (139,534) Participating insurance contracts 12,388 Participating investment contracts 6,863 Unallocated divisible surplus (897) Non-participating value of in-force business (434) Non-participating insurance contracts 20,912 Non-participating investment contracts 103,281 Borrowings 58 Provisions 503 Deferred income 238 Deferred tax liabilities 88 Income tax liabilities (44) Other creditors (3,169) Net asset value attributable to unitholders 575 Non-current liabilities held for sale 634 --------------------------------------------------- 1,971 =============================================================================== Part B P9 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Notes to the reconciliation of the Balance Sheet at 31 December 2004, at 1 January 2004 and reconciliation of Income Statement for 2004 The UK GAAP balance sheet has been presented in a format consistent with International Financial Reporting Standards (IFRS). No changes have been made to the previously reported numbers for UK GAAP and the analyses of the adjustments are based on UK GAAP as at 31 December 2004. (i) Dividend recognition Under UK GAAP dividends are accrued in the period to which they relate irrespective of when they are declared or approved. Under International Accounting Standard (IAS) 10, 'Events after the Balance Sheet Date' dividends are only accrued when declared and appropriately approved. This has resulted in an increase in shareholders' equity of Â£224m at 31 December 2004 (1 January 2004: Â£216m). (ii) Investments valuation Under UK GAAP the investments of Legal & General Group Plc and its subsidiaries (Group) are measured at current value with gains and losses reflected in the income statement with the exception of some overseas investments which are held at amortised cost. Under IAS 39, 'Financial Instruments: Recognition and Measurement' the use of amortised cost is restricted and therefore all of the Group's investments will be valued at fair value. IAS 39 requires fair value for listed investments to be calculated on a bid basis rather than the mid basis used for some of the Group's assets under UK GAAP. This change in valuation is largely offset by a corresponding change to the technical provisions and the unallocated divisible surplus (referred to as the fund for future appropriations under UK GAAP). The net impact is an increase in shareholders' equity of Â£16m as at 31 December 2004 (1 January 2004: Â£6m). Profit after tax increases by Â£10m for the year ended 31 December 2004. Under IFRS the movement in fair value of investments is recognised in the income statement except for assets classified as available-for-sale (AFS). Changes in the fair value of AFS assets, other than related impairment and foreign exchange gains and losses, are recognised in a separate component of equity within other reserves. A number of the Group's overseas contracts do not contain discretionary participating features as defined by IFRS 4, 'Insurance Contracts'. Gains and losses on assets backing these contracts which were previously recognised in the fund for future appropriations under UK GAAP must now be recognised in shareholders' equity under IFRS. These adjustments have resulted in an increase to shareholders' equity of Â£28m as at 31 December 2004 (1 January 2004: Â£30m). (iii) Accounting for investment contracts Product classification Under UK GAAP all contracts written by an insurance company are accounted for on a similar basis irrespective of whether there has been a transfer of significant insurance risk. Under IFRS 4 products must be classified for accounting purposes as either insurance contracts, participating investment contracts or non-participating investment contracts. Accounting for non-participating investment contracts Under UK GAAP the liability under unit linked contracts is measured by reference to the market value of the underlying linked assets plus a prudential regulatory reserve. All of the Group's non-participating investment contracts are unit linked. Under IFRS these liabilities must be valued at amortised cost. However, the Group has applied guidance issued by the UK's Accounting Standards Board (ASB). This clarifies that UK insurance companies are able to continue to measure liabilities arising from unit linked investment contracts by reference to the value of the underlying units, assets, share index or reference value and take changes in that value through the income statement. Consequently, under IFRS the unit linked liability is calculated at current value but excludes any prudential reserves. This has resulted in an increase in shareholders' equity of Â£56m as at 31 December 2004 (1 January 2004: Â£65m). Profit after tax decreases by Â£9m for the year ended 31 December 2004. Revenue and expenses for investment contracts are recognised in accordance with IAS 18, 'Revenue'. Under IAS 18, revenue arising from investment contracts must be recognised as services are provided over the life of the contract and, while only directly attributable incremental acquisition costs are deferred, the introduction of IFRS significantly extends the range of investment contracts where this deferral is appropriate. Also, under IFRS, an explicit deferred income liability is recognised for any front end fees received which relate to services to be provided in future periods. Under UK GAAP no such liability is recognised as front end fees are recognised when received. The net impact of these adjustments is a decrease in shareholders' equity of Â£12m as at 31 December 2004 (1 January 2004: Â£3m). Profit after tax decreases by Â£9m for the year ended 31 December 2004. =============================================================================== Part B P10 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- (iv) Participating contract liabilities Under IFRS, participating contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices. In the UK, the Group has adopted Financial Reporting Standard (FRS) 27 'Life Assurance' which was issued by the ASB in December 2004. Under FRS 27 participating contract liabilities are determined on a realistic basis. This has resulted in an increase in participating contract liabilities of Â£810m and a reduction in deferred acquisition costs of Â£14m at 31 December 2004. A corresponding amount has been deducted from the unallocated divisible surplus in accordance with FRS 27. There is no impact on shareholders' equity or profit as a result of this change. (v) Claims equalisation provision Under UK GAAP an equalisation provision is recognised in the individual accounts of general insurance companies to reduce the volatility in results arising from exceptional levels of claims in certain classes of business. Under IFRS, such provisions are not permitted as no liability exists at the balance sheet date. Elimination of the claims equalisation provision results in an increase in shareholders' equity of Â£36m at 31 December 2004 (1 January 2004: Â£31m), and an increase of Â£5m to profit after tax for the year ended 31 December 2004. (vi) Accounting for pensions obligations Under IAS 19, 'Employee Benefits' the defined benefit pension obligation is recognised in the Group's consolidated balance sheet. The amount recognised is the present value of the defined benefit obligation reduced by the fair value of scheme assets. Investments that do not meet the definition of plan assets, because they are insurance policies issued by a subsidiary, are not deducted from the pension scheme obligation, but instead are offset by a reduction to the corresponding liability to the scheme. Accordingly, the scheme assets of Â£344m which consist of annuities issued by Society are presented as a deduction from the Group's insurance liabilities, and not deducted from the defined benefit obligation. This presentation, illustrated below has no effect on shareholders' equity. 2004 Â£m Gross pension obligation included in provisions 503 Annuity obligations insured by Society (344) -------- Defined benefit pension deficit 159 Deferred tax (48) -------- Net pension liability 111 ======= Recognition of the defined benefit pension scheme deficit, net of deferred tax, results in a decrease in shareholders' equity at 31 December 2004 of Â£67m (1 January 2004: Â£41m), and a decrease in the unallocated divisible surplus of Â£44m (1 January 2004: Â£26m), representing amounts allocated to policyholders of participating contracts. The Group has chosen to recognise the total actuarial losses arising in the year of Â£43m in the Statement of Recognised Income and Expense, and to allocate Â£17m to the unallocated divisible surplus. (vii) Convertible debt accounting Under UK GAAP the convertible bond is recognised as a single instrument in the 31 December 2004 balance sheet at amortised cost of Â£521m (1 January 2004: Â£518m). Under IAS 39 the issuer's right to settle the conversion option in cash is an embedded derivative liability and must be measured at fair value with gains and losses recognised in the income statement. At 31 December 2004 the derivative liability recognised in the balance sheet is Â£4m (1 January 2004: Â£9m). The debt portion of the convertible bond is recorded as a liability at amortised cost on an effective yield basis until extinguished on conversion or on maturity of the bond. The interest amount in the income statement is calculated based on a market rate that would have been applicable for a similar debt instrument with no conversion option. At 31 December 2004 the debt liability recognised in the balance sheet has reduced by Â£27m (1 January 2004: Â£40m). Overall, this change in accounting treatment has resulted in an increase in shareholders' equity of Â£15m as at 31 December 2004 (1 January 2004: Â£22m). Profit after tax decreases by Â£7m for the year ended 31 December 2004. =============================================================================== Part B P11 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- (viii) Consolidation of additional entities IFRS requires the consolidation of certain mutual funds, other investment vehicles and employee share trusts which do not require consolidation under UK GAAP. This arises from a broader definition of when an entity is considered to be under the control of an investor. Consolidation of mutual funds has resulted in an increase in total assets and liabilities of Â£623m at 31 December 2004 (1 January 2004: Â£507m). The third party interest is included in liabilities as net asset value attributable to unit holders. The consolidation of these funds has no impact on shareholders' equity or profit after tax. Consolidation of property partnerships has resulted in an increase in total assets of Â£279m (1 January 2004: Â£666m) and liabilities of Â£75m at 31 December 2004 (1 January 2004: Â£526m). Third party interests of Â£204m at 31 December 2004 (1 January 2004: Â£140m) in these partnerships are shown as minority interests. Included in the increased liabilities are non-recourse borrowings of Â£67m at 31 December 2004 (1 January 2004: Â£486m) which relate to loans secured on specific properties. The decrease in borrowings during the year is due to the conversion of a partnership interest into units in a unit trust structure in July 2004. The consolidation of these funds has no impact on shareholders' equity or profit after tax. During December 2004 the Group committed to reduce its investment in its venture capital subsidiaries. These investments will cease to be subsidiaries of the Group from 2005 and the continuing interest will be accounted for as investments. Under IFRS 5 'Non-current assets held for sale and discontinued operations', the change in status of the Group's ownership is accounted for as a disposal of subsidiaries and an acquisition of investments. The aggregated assets, liabilities and results of these subsidiaries are presented on single lines as opposed to being fully consolidated on a line by line basis. These are presented separately as discontinuing operations in the Group's consolidated income statement and as non-current assets and liabilities held for sale in the consolidated balance sheet. Consolidation of the employee share trusts, which hold Legal and General Group Plc (Company) shares to satisfy future employee share awards has resulted in a decrease in shareholders' equity of Â£14m at 31 December 2004 (1 January 2004: Â£19m), reflecting their classification as treasury shares. (ix) Investment contracts - deposit accounting Under UK GAAP all premiums receivable and claims payable are recognised in the income statement. Under IFRS amounts receivable under investment contracts are no longer shown as premiums in the income statement but are treated as deposits and added to investment contract liabilities. Similarly, amounts payable under investment contracts are not recorded as claims in the income statement but as deductions from investment contract liabilities. This is reflected as a reduction in revenue of Â£17,911m and expenses of Â£17,911m for the year ended 31 December 2004. There is no impact on shareholders' equity. (x) Other adjustments Under UK GAAP the cost of share awards other than exempted share option plans is recognised over the period to which the employees' service relates. The total cost recognised is equal to the cost to the Group of settling the awards less any contributions received from the employees. Under IFRS 2, 'Share-based Payment' the cost of all share awards is recognised over the vesting period of the share award based on the fair value at the date of the grant. The effect of this change in accounting policy is an increase of Â£16m in shareholders' equity as at 31 December 2004 (1 January 2004: Â£7m). There is no impact on profit after tax for the year ended 31 December 2004 as a result of this change. Changes in deferred tax accounting, the use of average exchange rates for translation of subsidiaries' income statements and the implementation of hedge accounting results in a decrease in shareholders' equity of Â£3m as at 31 December 2004 (1 January 2004: increase of Â£5m). Profit after tax decreases by Â£2m for the year ended 31 December 2004. A number of adjustments required under IFRS relate primarily to presentational or reclassification changes which have no underlying impact on shareholders' equity. â€¢ Under UK GAAP, the movement in the deferred tax liability relating to assets backing unit linked liabilities is included in the change in technical provisions in the income statement. This treatment is permitted under the ABI SORP applicable for UK GAAP accounts. However, under IFRS all movements in deferred tax balances (other than movements taken directly to equity) must be included within the income statement tax expense. This has the effect of reducing expenses for the year ended 31 December 2004 by Â£27m but increasing the income statement tax expense by the same amount. =============================================================================== Part B P12 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- â€¢ Assets held to cover linked liabilities as at 31 December 2004 of Â£108,297m are no longer disclosed in a single line but are reported in the various asset classifications. â€¢ Technical provisions are reclassified under IFRS as either insurance contract liabilities or investment contract liabilities based on the accounting policy on product classification on page 14. â€¢ Temporary pension monies as at 31 December 2004 of Â£3,295m (1 January 2004: Â£369m) are reclassified under IFRS to investment contract liabilities. =============================================================================== Part B P13 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Basis of preparation The Group's consolidated opening and closing IFRS balance sheet, the consolidated income statement for 2004 and the statement of recognised income and expense ('the IFRS financial information') have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and adopted by the European Commission (EC) to be effective for 2005 year ends. The IFRS financial information set out on pages 3 to 8 and 21 to 22 establishes the comparative financial information to be included in the Group's first set of IFRS financial statements for the year ended 31 December 2005. Due to the continuing work of the IASB and possible amendments to the interpretive guidance, the Group's accounting policies and consequently the information presented may change prior to the publication of the Group's first IFRS results in July 2005. The Group has elected to early adopt the recently issued amendment to IAS 19. It is expected that the amendment will be endorsed by the EC in time for adoption in the Group's 2005 full year results. In October 2004 the EC adopted a carved out version of IAS 39. The carve out removes the use of the fair value option for financial liabilities and relaxes the hedge accounting requirements. However, guidance issued by the UK's ASB, clarifies that UK insurance companies are able to: (i) apply the hedge accounting provisions within IAS 39 in full; (ii) continue to measure liabilities arising from unit linked contracts by reference to the value of the underlying units, assets, share index or reference value; and (iii) take changes in that value through the income statement. The Group has adopted this ASB guidance. In accordance with IFRS 4, the Group continues to apply existing accounting policies to its insurance contracts and participating investment contracts, but has the option to make improvements to its policies if the changes make the financial statements more relevant to decision making needs of the users. The Group has elected to make improvements to its accounting policy for participating contracts in the UK by adopting FRS 27 issued by the ASB in December 2004 in the IFRS financial information. The ASB has acknowledged the difficulty of applying the requirements of FRS 27 retrospectively and it is the Group's view that it would be impractical to do so. Therefore only the balance sheet at 31 December 2004 will be restated for the impact of FRS 27. No restatements for FRS 27 will be made to either the IFRS opening or interim 2004 balance sheet or income statement. Certain amounts recorded in the IFRS financial information include estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Actual results may differ from the estimates made. Where estimates had previously been made under UK GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made on transition to IFRS. Judgements affecting the Group's balance sheet have not been revisited with the benefit of hindsight. Under IFRS, the Group's Consolidated Cash Flow Statement includes all cash flows of the Group, including those relating to the long term fund. Under UK GAAP, the cash flows of the long term fund are explicitly excluded, except to the extent that funds are transferred to shareholders. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. =============================================================================== Part B P14 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Accounting Policies The principal accounting polices adopted in preparing the restated IFRS balance sheet and income statement are set out below. (A) First time adoption of IFRS The Group is required to determine its IFRS accounting polices and apply them retrospectively to establish its opening balance sheet under IFRS. However, IFRS 1, 'First-time Adoption of International Financial Reporting Standards' allows a number of exemptions on adoption of IFRS for the first time. The date of transition to IFRS for the Group is 1 January 2004, as required by IFRS. The Group has not taken advantage of the exemption from the requirement to restate comparative information in the first year of adoption of IFRS for IAS 32, 'Financial Instruments: Disclosure and Presentation', IAS 39 and IFRS 4. The Group has taken advantage of the following exemptions as permitted by IFRS 1: Cumulative translation differences Cumulative translation differences of foreign operations have not been restated on an IFRS basis. These are deemed to be zero at the date of transition. Share-based payment plans The provisions of IFRS 2, have not been applied to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005. Employee defined benefit obligations All cumulative actuarial gains and losses have been recognised in equity at the date of transition to IFRS. Compound financial instruments The equity components of historic compound financial instruments which are no longer outstanding at the date of transition to IFRS have not been separated. Business combinations For business combinations before 1 January 2004 the Group has elected not to apply the provisions of IFRS 3, 'Business Combinations' retrospectively. Accordingly no adjustments have been made for historical business combinations. The disclosure required by IFRS 1 concerning the transition from UK GAAP to IFRS is given on pages 6 to 12 and 21 to 22. (B) Basis of consolidation The consolidated financial information incorporates the assets, liabilities, equity, revenues, expenses and cash flows of the Company and of its subsidiary undertakings drawn up to 31 December each year. Subsidiaries are those entities (including special purpose entities, mutual funds and unit trusts) in which the Group directly or indirectly has the power to govern the operating and financial policies in order to gain economic benefits. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from gaining control. All significant inter-company balances, profits and transactions are eliminated. (C) Associates and joint ventures Associates are entities over which the Group has significant influence but which it does not control. Consistent with IAS 28, 'Investments in Associates' it is presumed that the Group has significant influence where it has between 20% and 50% of the voting rights in the investee. Joint ventures are entities where the Group and other parties undertake an activity which is subject to joint control. The Group's interests in associates and joint ventures form part of an investment portfolio held through venture capital partnerships, mutual funds, unit trusts and similar entities. In accordance with the requirements of IAS 28 and IAS 31, 'Interests in Joint Ventures' the interests are classified as held for trading investments and measured at fair value, with changes in fair value recognised in the income statement. =============================================================================== Part B P15 Legal & General Group Plc Notes to the IFRS financial information ------------------------------------------------------------------------------- (D) Product classification The Group's products are classified for accounting purposes as either insurance contracts, participating investment contracts or non-participating investment contracts. Insurance contracts are contracts which transfer significant insurance risk at the inception of the contract. Contracts that do not transfer significant insurance risk are investment contracts. Both insurance and investment contracts may contain a discretionary participating feature which is defined as a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. Participating contracts consist of most with-profit contracts in the UK and most Guarantie Long Terme contracts in France. For practical reasons certain hybrid contract types, containing both insurance and investment features have been treated as investment contracts when accounting for premiums, claims and other revenue. (E) Long term business Premium income For insurance contracts, premiums are recognised as revenue when the liabilities arising from them are created. All other premiums including annuity considerations are accounted for when due for payment. For investment contracts, amounts collected as premiums are not included in the income statement but are reported as deposits to investment contract liabilities in the balance sheet. Revenue from investment contracts Fees charged for investment management services are recognised as revenue as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management services for institutional and retail fund management are also recognised on this basis. Claims For insurance contracts, death claims are accounted for on notification of death. Surrenders for non-linked policies are accounted for when payment is made. Critical illness claims are accounted for when admitted. All other claims and surrenders are accounted for when payment is due. Claims payable include the direct costs of settlement. For investment contracts, claims are not included in the income statement but are instead deducted from investment contract liabilities. The movement in investment contract liabilities consists of claims incurred in the period less the corresponding elimination of the policyholder liability originally recognised in the balance sheet and the investment return credited to policyholders. Acquisition costs For insurance and participating investment contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and processing new business. Acquisition costs, relating to non-participating insurance contracts, which are incurred during a financial year are deferred by use of an explicit asset which is amortised over the period during which the costs are expected to be recoverable, and in accordance with the incidence of future related margins. For participating contracts, acquisition costs are charged to the income statement when incurred. For non-participating investment contracts only directly related acquisition costs, which vary with and are related to securing new contracts and renewing existing contracts, are deferred to the extent that they are recoverable out of future revenue. All other costs are recognised as expenses when incurred. Insurance and participating investment contract liabilities Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices. In the UK, the Group has adopted FRS 27 which was issued by the ASB in December 2004. In the UK, the insurance contract provision is determined following an annual investigation of the long term fund in accordance with regulatory requirements. The provisions are calculated on the basis of current information and using the gross premium valuation method. For participating contracts the liabilities to policyholders are determined on a realistic basis in accordance with FRS 27. This includes an assessment of the cost of any future options and guarantees included in this business on a market consistent basis. The calculation also takes account of bonus decisions which are consistent with Society's Principles and Practices of Financial Management. The shareholders' share of the future cost of bonuses is excluded from the assessment of the realistic liability. In determining the realistic value of liabilities for participating contracts, the value of non-participating business written in the with-profits fund is accounted for as part of the calculation. The present value of future profits (VIF) on this business is separately determined and the value of the asset is deducted from the sum of the liabilities for participating contracts and the unallocated divisible surplus. The long term insurance contract liabilities for business transacted by overseas subsidiaries are determined on the basis of recognised actuarial methods which reflect local supervisory principles or, in the case of the USA, on the basis of US Generally Accepted Accounting Principles (GAAP). =============================================================================== Part B P16 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Long term business provisions can never be definitive as to their timing nor the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Unallocated divisible surplus The nature of benefits for participating contracts is such that the allocation of surpluses between equity holders and participating policyholders is uncertain. The amount that has not been so allocated at the balance sheet date is classified within liabilities as the unallocated divisible surplus. Adjustments made to comply with FRS 27 are charged to the unallocated divisible surplus. Non-participating investment contracts Non-participating investment contracts consist of unit linked contracts. Unit linked liabilities are measured by reference to the value of the underlying net asset value of the Group's unitised investment funds at the balance sheet date. (F) General insurance business Results for the general insurance business are determined after taking account of unearned premiums, outstanding claims and unexpired risks using the annual basis of accounting. Premium income Premiums are accounted for in the period in which the risk commences. Estimates are included for premiums not notified by the year end and provision is made for the anticipated lapse of renewals not yet confirmed. Those proportions of premiums written in a year which relate to periods of risk extending beyond the end of the year are carried forward as unearned premiums. Acquisition costs A proportion of commission and other acquisition costs relating to unearned premiums is carried forward as deferred acquisition costs or, with regard to reinsurance outwards, as deferred income. Technical provisions Provisions, together with related reinsurance recoveries, are established on the basis of current information. Such provisions can never be definitive as to their timing nor the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Claims and related reinsurance recoveries are accounted for in respect of all incidents up to the year end. Provision is made on the basis of available information for the estimated ultimate cost, including claims settlement expenses, of claims reported but not yet settled and claims incurred but not yet reported. An unexpired risk provision is made for any overall excess of expected claims and deferred acquisition costs over unearned premiums and after taking account of investment return. (G) Liability adequacy tests The Group performs liability adequacy testing on its insurance provisions to ensure that the carrying amount of provisions (less related deferred acquisition costs) is sufficient to cover estimated future cash flows. When performing the liability adequacy test, the Group discounts all contractual cash flows and compares this amount to the carrying value of the liability. Any deficiency is immediately charged to the income statement. (H) Reinsurance The Group's insurance subsidiaries cede insurance premiums and risk in the normal course of business in order to limit the potential for losses. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct or inwards reinsurance business being reinsured. Reinsurance assets include balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded in total in the consolidated balance sheet unless a right of offset exists. =============================================================================== Part B P17 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- (I) Intangible assets Goodwill Goodwill on the acquisition of subsidiaries prior to 1998 has been charged directly to reserves. Prospectively the Group's policy is to recognise goodwill on the balance sheet as an intangible asset, measured at cost less any accumulated impairment losses. Purchased interests in long term business A portfolio of in-force contracts acquired either directly or through the acquisition of a subsidiary undertaking is capitalised at an actuarially determined fair value. The value of business acquired represents the present value of future profits embedded in acquired insurance contracts. These amounts are amortised over the anticipated lives of the related contracts in the portfolio. (J) Investments Investment property Investment property comprises land and buildings which are held for long term rental yields. It is carried at fair value with changes in fair value recognised in the income statement within net investment returns. Investment property in the UK is valued bi-annually by external chartered surveyors at open market values in accordance with the 'Appraisal and Valuation Manual' of The Royal Institution of Chartered Surveyors. Outside the UK, valuations are produced in conjunction with external qualified professional valuers in the countries concerned. In the event of a material change in market conditions between the valuation date and balance sheet date an internal valuation is performed and adjustments made to reflect any material changes in fair value. Financial investments The Group classifies its financial investments on initial recognition as held for trading (HFT), designated at fair value through profit and loss (FVTPL), available-for-sale (AFS) or loans and receivables. The Group's policy is to measure investments at FVTPL except in the US where the related liability is valued on a passive basis (not using current information), in which case investments are classified as AFS. All derivatives other than those designated as hedges are classified as HFT. The fair values of quoted financial investments are based on current bid prices. If the market for a financial investment is not active, the Group establishes fair value by using valuation techniques such as recent arm's length transactions, reference to similar listed investments, discounted cashflow models or option pricing models. Investments where fair value cannot be measured reliably are measured at cost less impairment. Investments classified as HFT and FVTPL are measured at fair value with gains and losses reflected in the income statement. Investments classified as AFS are measured at fair value with unrealised gains and losses recognised in a separate reserve within equity. Realised gains and losses, impairment losses and foreign exchange movements are reflected in the income statement. Loans and receivables are measured at amortised cost on an effective yield basis. (K) Impairment policy The Group reviews the carrying value of its assets at each balance sheet date. If the carrying value of an asset is impaired, that is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement. There must be objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset. Impairment is only recognised if the loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Non-financial assets that have an indefinite useful life are not subjected to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. (L) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. =============================================================================== Part B P18 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- (M) Derivative financial instruments and hedge accounting The Group's activities expose it to the financial risks of changes in exchange and interest rates. The Group uses derivatives such as foreign exchange forward contracts and interest rate swap contracts to hedge these exposures. The Group uses hedge accounting provided the prescribed criteria are met to recognise the offsetting effects of changes in the fair value or cash flow of the derivative instrument and the hedged item. The Group's principal uses of hedge accounting, are to: (i) recognise in shareholders' equity the changes in the fair value of derivatives designated as hedges of a net investment in a foreign operation. Any cumulative gains and or losses are recognised in the income statement on disposal of the foreign operation; and (ii) defer the changes in the fair value of derivatives designated as the hedge of a future cash flow attributable to a recognised asset or liability, a forecasted transaction, or a firm commitment until the period in which the future transaction is recognised. The relationship between the hedging instrument and the hedged item, together with the risk management objective and strategy for undertaking the hedge transaction, are documented at the inception of the transaction. The effectiveness of the hedge is documented and monitored on an ongoing basis. Hedge accounting is only applied for highly effective hedges (between 80% and 125% effectiveness). Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. (N) Embedded derivatives Where the risks and characteristics of derivatives embedded in other contracts are not closely related to those of the host contract, the derivative is separated from that host contract and measured at fair value. (O) Borrowings, including convertible bond Borrowings are recognised initially at fair value, net of transaction costs, and subsequently stated at amortised cost. The difference between the proceeds and the redemption value is recognised in the income statement over the borrowing period using the effective interest method. For a convertible bond, the fair value of the conversion option is calculated on issue using an option pricing model. This is recognised as a derivative liability and is revalued to fair value at each reporting period. Fair value gains and losses are taken through the income statement. The remainder of the proceeds less attributable expenses is allocated to the value of the debt portion of the convertible bond. This amount is recorded as a liability on an amortised cost basis using the effective interest rate until extinguished on conversion or on maturity of the bond. (P) Income taxes Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement except where it relates to an item that is recognised in equity. Current tax is the expected tax payable on the taxable profit for the period and any adjustment to the tax payable in respect of previous periods. The total income tax expense for the period includes tax which is not related to profits earned by equity holders for the period, being the income tax paid by the Group in respect of UK life policy holder returns. The income statement income tax charge has therefore been apportioned between the element attributable to policy holder returns and the element attributable to equity holders' profits ('equity holder tax'). For short term business all income tax is classified as equity holder tax. The net equity holders' profit from UK long term business (other than investment return on equity holders' funds within the long term fund) has borne tax at the effective equity holder tax rate, which is sufficiently close to the standard rate of UK corporation tax for that to be used in the financial statements. The balance of income taxes associated with long term business profits is then classified as income tax attributable to policy holder returns. There is no definitive method of calculating the effective equity holder tax rate. A number of alternative methods are consistently used, in order to assess the validity of using the standard rate of UK corporation tax. For equity holders' funds within the UK long term business fund, the equity holder income tax represents the actual income tax on the return on those funds. For international long term business the equity holder income tax is the total income tax in respect of profits earned from that business. =============================================================================== Part B P19 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- Deferred income tax Deferred income tax is provided in full, using the balance sheet liability method, on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax is measured using tax rates expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled based on tax rates and law which have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are not discounted. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future (or if it will, then it will not generate any incremental tax liability for the Group). No deferred tax is provided at the incremental rate on the undeclared surplus in the UK long term fund represented by the Shareholder Retained Capital (SRC) on the grounds that, at the balance sheet date, no obligation to make a declaration of surplus exists and there is no expectation that such a declaration will occur. (Q) Leases Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made as lessees under operating leases (net of any incentives from the lessor) are charged to the income statement on a straight line basis over the period of the lease. (R) Employee benefits Pension obligations The Group operates a number of defined benefit and defined contribution pension schemes in the UK and overseas. The assets of all UK defined benefit schemes are held in separate trustee administered funds which are subject to regular actuarial valuation every three years and updated by formal reviews at reporting dates. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is actuarially calculated each year using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows. The discount rate is based on market yields on high-quality corporate bonds which are denominated in the currency in which the benefits will be paid, and that have terms to maturity which approximate to those of the related pension liability. The Group intends to early adopt the amendment to IAS 19 published in December 2004 permitting the recognition of all actuarial gains and losses immediately in equity through the statement of recognised income and expenses. The Group pays contractual contributions in respect of defined contribution plans. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Share-based payments The Group operates a number of share-based payment plans. The fair value of the equity instrument granted is recognised as an expense, spread over the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards, excluding the impact of any non-market vesting conditions. At each balance sheet date, the Group revises its estimate of the number of equity instruments that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement and a corresponding adjustment is made to equity over the remaining vesting period. On vesting or exercise, the difference between the expense charged to the income statement and the actual cost to the Group is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital and share premium. (S) Treasury shares Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to shareholders. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to shareholders, net of any directly attributable incremental transaction costs and the related income tax effects. =============================================================================== Part B P20 Legal & General Group Plc Notes to the IFRS financial information for the year ended 31 December 2004 ------------------------------------------------------------------------------- (T) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is more probable than not. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (U) Foreign currency translation Foreign currency transactions are translated into sterling, the Group's presentational currency, using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses are recognised in the income statement, except when recognised in equity as qualifying cash flow and net investment hedges. The assets and liabilities of all the overseas subsidiaries are translated into sterling at the closing rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which these entities operate. (V) Net investment return The reporting of net investment return comprises investment income and investment gains and losses. Investment income includes dividends, interest and rent. Dividends are accrued on an ex-dividend basis. Interest and rent are included on an accruals basis. Interest income for financial assets that are not classified as FVTPL is recognised using the effective interest method. (W) Other income and expenses Other operating income comprises primarily fee income from estate agency operations and is accounted for when due. Other expenses comprise primarily the expenses incurred in estate agency operations, institutional fund management and retail investment business, together with unallocated corporate expenses. Other costs are accounted for as they arise. (X) Dividend recognition Dividend distribution to the Company's shareholders is recognised as a liability in the period in which the dividends are declared, and for the final dividend, when approved by the Company's shareholders at the general meeting. =============================================================================== Part B P21 Legal & General Group Plc Opening Consolidated Balance Sheet As at 1 January 2004 ------------------------------------------------------------------------------- Reconciliation of the Balance Sheet as at 1 January 2004 As reported UKGAAP Adjust- (MSSB) ments IFRS Â£m Â£m Â£m Assets Investment property 4,228 959 5,187 Financial investments 31,040 82,165 113,205 Assets held to cover linked liabilities 84,308 (84,308) - Reinsurers' share of contract provisions 3,249 - 3,249 Deferred acquisition costs 892 145 1,037 Income tax recoverable - 55 55 Other assets 1,143 (52) 1,091 Non-current assets held for sale - 507 507 Cash and cash equivalents 65 2,408 2,473 ------ ------ ------ 124,925 1,879 126,804 ======= ======= ======= Equity and liabilities Shareholders' equity 3,248 319 3,567 Minority interests - 159 159 Technical provisions 117,341 (117,341) - Participating insurance contracts - 11,581 11,581 Participating investment contracts - 6,387 6,387 Unallocated divisible surplus 1,498 (81) 1,417 Non-participating insurance contracts - 19,535 19,535 Non-participating investment contracts - 79,637 79,637 Borrowings 1,475 464 1,939 Provisions - 411 411 Deferred income - 185 185 Deferred tax liabilities 170 54 224 Income tax liabilities 63 (63) - Other creditors 1,130 (289) 841 Net asset value attributable to unitholders - 466 466 Non-current liabilities held for sale - 455 455 ------ ------ ------ 124,925 1,879 126,804 =============================================================================== Part B P22 Legal & General Group Plc Opening Consolidated Balance Sheet As at 1 January 2004 ------------------------------------------------------------------------------- Analysis of adjustments to the Balance Sheet as at 1 January 2004 Accounting for Dividend Investment investment recognition valuation contracts (Note i) (Note ii) (Note iii) Â£m Â£m Â£m Assets Investment property - - - Financial investments - (75) - Assets held to cover linked liabilities - - - Reinsurers' share of contract provisions - - - Deferred acquisition costs - - 141 Income tax recoverable - - - Other assets - (8) - Non-current assets held for sale - - - Cash and cash equivalents - - - ------------------------------------------------------------------------------- - (83) 141 =============================================================================== Equity and liabilities Shareholders' equity 216 36 62 Minority interests - - - Technical provisions - - - Participating insurance contracts - 14 - Participating investment contracts - - - Unallocated divisible surplus - (101) 47 Non-participating insurance contracts - (29) - Non-participating investment contracts - (21) (171) Borrowings - - - Provisions - - - Deferred income - - 185 Deferred tax liabilities - 18 18 Income tax liabilities - - - Other creditors (216) - - Net asset value attributable to unitholders - - - Non-current liabilities held for sale - - - ------------------------------------------------------------------------------- - (83) 141 =============================================================================== Accounting Claim for Convertible equalisation pension debt provision obligations accounting (Note v) (Note vi) (Note vii) Â£m Â£m Â£m Assets Investment property - - - Financial investments - - - Assets held to cover linked liabilities - - - Reinsurers' share of contract provisions - - - Deferred acquisition costs - - - Income tax recoverable - - - Other assets - - - Non-current assets held for sale - - - Cash and cash equivalents - - - ------------------------------------------------------------------------------- - - - =============================================================================== Equity and liabilities Shareholders' equity 31 (41) 22 Minority interests - - - Technical provisions - - - Participating insurance contracts - - - Participating investment contracts - - - Unallocated divisible surplus - (26) - Non-participating insurance contracts (46) (316) - Non-participating investment contracts - - - Borrowings - - (40) Provisions - 411 - Deferred income - - - Deferred tax liabilities 14 (28) 9 Income tax liabilities - - - Other creditors 1 - 9 Net asset value attributable to unitholders - - - Non-current liabilities held for sale - - - ------------------------------------------------------------------------------- - - - =============================================================================== Consolidation of additional Other Total entities adjustments adjustments (Note viii) (Note x) Â£m Â£m Â£m Assets Investment property 875 84 959 Financial investments 65 82,175 82,165 Assets held to cover linked liabilities - (84,308) (84,308) Reinsurers' share of contract provisions - - - Deferred acquisition costs - 4 145 Income tax recoverable - 55 55 Other assets 31 (75) (52) Non-current assets held for sale 507 - 507 Cash and cash equivalents 161 2,247 2,408 ------------------------------------------------------------------------------- 1,639 182 1,879 =============================================================================== Equity and liabilities Shareholders' equity (19) 12 319 Minority interests 151 8 159 Technical provisions - (117,341) (117,341) Participating insurance contracts - 11,567 11,581 Participating investment contracts - 6,387 6,387 Unallocated divisible surplus - (1) (81) Non-participating insurance contracts - 19,926 19,535 Non-participating investment contracts - 79,829 79,637 Borrowings 486 18 464 Provisions - - 411 Deferred income - - 185 Deferred tax liabilities - 23 54 Income tax liabilities - (63) (63) Other creditors 100 (183) (289) Net asset value attributable to unitholders 466 - 466 Non-current liabilities held for sale 455 - 455 ------------------------------------------------------------------------------- 1,639 182 1,879 =============================================================================== Part B P23 Legal & General Group Plc Auditors' report For the year ended 31 December 2004 ------------------------------------------------------------------------------- Special Purpose Audit Report of PricewaterhouseCoopers LLP to Legal & General Group plc ('the Group') on its International Financial Reporting Standards (IFRS) Financial Information We have audited the accompanying consolidated IFRS balance sheet of Legal & General Group plc ('the Group') as at 31 December 2004 and the related consolidated IFRS income statement and statement of recognised income and expense for the year then ended and the related notes (hereinafter referred to as 'the IFRS financial information') set out on pages 3 to 22. Respective responsibilities of directors and PricewaterhouseCoopers The directors of the Group are responsible for the preparation of the IFRS financial information which have been prepared as part of the Group's conversion to IFRS. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as to whether the IFRS financial information have been prepared, in all material respects, in accordance with the basis of preparation set out on page 13 to the IFRS financial information. This report, including the opinion, has been prepared for and only for the Company for the purposes of assisting with the Group's conversion to IFRS 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 read the other information accompanying the IFRS financial information and consider whether it is consistent with the IFRS financial information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the IFRS financial information. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the IFRS financial information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the IFRS financial information, and of whether the accounting policies are appropriate to the Group's circumstances 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 IFRS financial information 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 the information in the IFRS financial information. Emphasis of matter Without qualifying our opinion, we draw your attention to the fact that page 13, which sets out the basis of preparation of the IFRS financial information, explains why there is a possibility that the IFRS financial information may require adjustment before their inclusion as comparative information in the Group's first set of statutory financial statements prepared on an IFRS basis for the year ended 31 December 2005. This is because Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee and further standards may be issued by the International Accounting Standards Board that will be adopted for financial years beginning on or after 1 January 2005. Additionally, IFRS is currently being applied in the United Kingdom and in a large number of other countries simultaneously for the first time. Furthermore, due to a number of new and revised Standards included within the body of Standards that comprise IFRS, there is not yet a significant body of established practice on which to draw in forming opinions regarding interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's first IFRS financial statements for the year ended 31 December 2005 may be subject to change. Moreover, we draw attention to the fact that, under IFRS's, only a complete set of financial statements comprising a balance sheet, income statement, statement of recognised income and expense, and cash flow statements, together with comparative financial information and explanatory notes, can provide a fair presentation of the Group's financial position, results of operations and cash flows in accordance with IFRS. Opinion In our opinion the accompanying IFRS financial information for the year ended 31 December 2004 have been prepared, in all material respects, in accordance with the basis of preparation set out on page 13, which describes how IFRS have been applied under IFRS 1, including the assumptions made by the directors of the Group about the standards and interpretations expected to be effective, and the policies expected to be adopted, when they prepare the first complete set of financial statements of the Group on an IFRS basis for the year to 31 December 2005. PricewaterhouseCoopers LLP Chartered Accountants London Date: 23 May 2005 This information is provided by RNS The company news service from the London Stock Exchange

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