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Standard Life plc - Annual Report and Accounts 2007
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Basis of preparation

EEV and IFRS reporting

The financial results are prepared on both a European Embedded Value (EEV) basis and an International Financial Reporting Standards (IFRS) basis as endorsed by the European Union (EU). All EU listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pension policies and is designed to give a more accurate reflection of the performance of long-term savings business. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the CFO forum. The CFO forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to ‘covered’ business, which mainly comprises the Group’s life and pension business. Non-covered business is generally reported on an IFRS basis. The EEV financial results have been prepared in accordance with the EEV methodology applied by the Group in Note 16 of the 2007 Supplementary EEV financial statements for 2007 and the 2006 Annual Report and Accounts for 2006. The IFRS financial results have been prepared on the basis of the IFRS accounting policies applied by the Group in the 2007 Group IFRS consolidated financial statements.

Operating EEV and underlying IFRS profit

The segmental analysis of IFRS underlying profit before tax presents profit before tax attributable to equity holders adjusted for non-operating items. The 2007 EEV consolidated income statement presents EEV profit showing both operating and non-operating items. In doing so the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group. The explanation of the underlying IFRS profit is consistent with the bases of preparation applied by the Group in the Group IFRS consolidated financial statements. The 2007 EEV consolidated income statement is presented in the Supplementary EEV financial statements section, as is the 2007 IFRS reconciliation of Group underlying profit to profit before tax.

Pro forma results

To provide users with a basis for comparison, the EEV and IFRS results for 2006 have been prepared on a pro forma basis. This represents the mutual results for the period prior to demutualisation, adjusted to calculate a profit figure for the Group as if its holding company had been a listed public company at the beginning of the period. Due to the nature of the adjustments required to the EEV and IFRS mutual figures, pro forma profit figures are not directly comparable and may differ from the actual results if the holding company of the Group had been a listed public company at the beginning of the relevant period.

Derivation of IFRS pro forma underlying profit

A reconciliation of the 2006 IFRS mutual results to pro forma profit is detailed in the table below with the pro forma adjustments prepared on a consistent basis with the accounting policies applied by the Group in the 2006 Annual Report and Accounts.

  Restated
2006
£m
Total net revenue 15,432
Total operating expense (14,751)
Share of profits from associates and joint ventures 129
Profit before tax 810
Total tax expenses (415)
Profit for the period 395
Shareholder tax 58
Profit before tax attributable to equity holders 453
   
Adjustments to derive pro forma profit  
Profit attributable to minority interest (112)
HFI adjustment to unallocated divisible surplus 83
HFI adjustment to tax 2
Deferred aquisition costs 94
Assumed interest on proceeds of share issues 18
New business reserving strain (4)
Pro forma profit before tax attributable to
equity holders and after minority interest		 534
   
Adjustments to derive underlying profit  
Volatility arising on different asset and liability valuation bases (25)
Impairment of intangibles 14
Restructuring expenses 17
Underlying profits before tax attributable
to equity holders and after minority interest		 540

The historical financial information (HFI) adjustments have been prepared in order to show the results which would have been attributable to equity holders and policyholders had The Standard Life Assurance Company been a company owned by equity holders under the terms of the Scheme of Demutualisation (the Scheme) throughout 2006. Additional adjustments are required to produce pro forma results which reflect the profit that would have arisen had the Scheme and anticipated post demutualisation capital and debt structure been in place at the start of the period.

As described in Note 47 Restatement for gross up of cash collateral received in the Group IFRS consolidated financial statements, the 2006 numbers have been restated in respect of income and expenses associated with certain cash collateral received. The impact was to increase total net revenue by £83m, share of profits from associates and joint ventures by £12m and total operating expenses by £95m. There was no impact on profit before tax or profit after tax.