Standard Life Aberdeen plc

Full Year Results 2018

Part 5 of 8

 

7. Independent auditors' report to the members of Standard Life Aberdeen plc

 

 

1. Our opinion is unmodified

We have audited the financial statements of Standard Life Aberdeen plc ('the Company') for the year ended 31 December 2018 which comprise the Consolidated income statement; Consolidated statement of comprehensive income; Consolidated statement of financial position; Consolidated statement of changes in equity; Consolidated statement of cash flows; Company statement of financial position; Company statement of changes in equity and the related notes, including the reconciliation of consolidated adjusted profit before tax to IFRS profit for the year and the accounting policies in Note 1.

In our opinion:

·  The financial statements give a true and fair view of the state of the Group's and of the parent Company's affairs as at 31 December 2018 and of the Group's profit for the year then ended

·  The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union

·  The parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework

·  The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our responsibilities are described below.

We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the group audit committee.

We were first appointed as auditor by the shareholders on 16 May 2017. The period of total uninterrupted engagement is for the two financial years ended 31 December 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

Overview
Materiality: group financial statements as a whole	£32m (2017: £38m) 4.8% (2017: 4.5%) of normalised profit before tax
Coverage	78% (2017:72%) of profits and losses that made up Group profit before tax
Key audit matters		vs 2017
Event Driven	New: The impact of uncertainties due to the UK exiting the European Union on our audit
Recurring Risk	Recoverability of group goodwill and of parent's investment in subsidiaries
Event Driven	New: Accounting for the obligations arising out of the disposal of Standard Life Assurance Limited ('SLAL') and investment In Phoenix
Event Driven	New: Carrying value of investment in Phoenix
Recurring risk	Valuation of Intangible Assets
Recurring risk	Valuation of defined benefit pension scheme obligation

 

2. Key audit matters: our assessment of risks of material misstatement

 

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

	The risk	Our response
The impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 42 to 47 (principal risks), page 39 (viability statement) and page 63 Audit Committee Report),	Unprecedented level of uncertainty: All audits assess and challenge the reasonableness of estimates, in particular as described in the recoverability of group goodwill and the parent's investment in subsidiaries, the valuation of the defined benefit pension scheme obligation and the carrying value of the investment in Phoenix below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the group's future prospects and performance.  In addition, we are required to consider the other information presented in the Annual Report including the principal risks disclosure and the viability statement and to consider the directors' statement that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown.	We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: Our Brexit knowledge - We considered the directors' assessment of Brexit-related sources of risk for the group's business and financial resources compared with our own understanding of the risks. We considered the directors' plans to take action to mitigate the risks. Sensitivity analysis - When addressing recoverability of group goodwill, the parent's investment in subsidiaries and the valuation of the defined benefit pension scheme obligation and other areas that depend on forecasts, we compared the directors' analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. Assessing transparency - As well as assessing individual disclosures as part of our procedures on recoverability of group goodwill, the parent's investment in subsidiaries, the valuation of the defined benefit pension scheme obligation and the carrying value of the investment in Phoenix below, we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. Our results: As reported under the recoverability of group goodwill, the parent's investment in subsidiaries, the valuation of the defined benefit pension scheme obligation and the carrying value of the investment in Phoenix below, we found the resulting estimates and related disclosures and disclosures in relation to going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

 

 

	The risk	Our response
Recoverability of group goodwill and of parent's investment in subsidiaries (Group Goodwill: £2,532m; 2017: £3,427m;  Goodwill impairment losses recognised: £891m (2017: £5m) (Company: Investments in subsidiaries, Impairment of subsidiaries: £589m (2017: 20 m)) Refer to page 63 (Audit Committee Report), page 146 (accounting policy) and page 147 (financial disclosures).	Subjective estimate: Goodwill in the group and the carrying amount of certain of the parent company's investments in subsidiaries are significant and at risk of irrecoverability due to reductions in assets under management. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. In the current year, goodwill in the group was impaired by £891m and the parent company's investments in subsidiaries was impaired by £589m. The effect of these matters is that, as part of our risk assessment, we determined that the value in use of goodwill and the recoverable amount of certain investments in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole.	Our procedures included: Our valuation and sector expertise: We used our own valuation specialists to assist us in assessing the appropriateness the Group's valuation model. This included comparing the Group discount rate assumptions with our own estimate of a range of reasonable discount rates, based on comparable company information. We also used our sector experience to evaluate the appropriateness of assumptions applied in key inputs such as revenue from customers, operating costs and discount rates. Sensitivity analysis: We performed our own sensitivity analysis which included assessing the effect of reasonably possible reductions in growth rates and forecast cash flows to evaluate the impact on current headroom and/or investment in subsidiaries valuation. Assessing transparency: We assessed whether the group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill and the recoverability of investment in subsidiaries. Our results: We found the group's assessment of the carrying value of goodwill in the group and the parent company's investment in subsidiaries to be acceptable (2017: acceptable).

 

	The risk	Our response
Accounting for the obligations arising out of disposal of SLAL and investment in Phoenix (Investment in associates £1,023m; 2017: Not applicable) Refer to page 63 (Audit Committee Report), page 152 (accounting policy) and pages 130 and 153 (financial disclosures).	Accounting application As SLA's investment in Phoenix is 19.98%, there is judgement as to whether Phoenix should be accounted for as an associate given significant influence is only presumed to exist per IAS 28 when 20% of equity is held. The risk is that the investment in Phoenix has been inappropriately accounted for as an associate, rather than as an equity investment. Subjective valuation - initial investment in Phoenix On investment, SLA's share of the fair value of the identifiable assets and liabilities of Phoenix was assessed and compared to the cost of the investment. In doing this, the principle area of risk relates to the valuation of the acquired value of in-force business ('AVIF'), the valuation of insurance contract liabilities and the valuation of level 3 assets. This assessment of fair value was made by the Directors of SLA and involves complex and significant judgements over a number of subjective assumptions. The effect of these matters is that, as part of our risk assessment, we determined that the accounting for the investment in Phoenix has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (Note 16) disclose the key judgements estimated by the Group.	Our procedures included: Assessing principles: We assessed the nature of the relationship with Phoenix by reviewing the terms in the sale and purchase agreement (SPA) and evaluated these against the criteria in IAS 28 to re-perform the significant influence assessment. Control design and operation: We tested the design of key controls including over management's process for modelling insurance contract liabilities, for setting and updating actuarial assumptions and in respect of the valuation of complex and illiquid financial investments. Benchmarking assumptions and industry experience: For key inputs we compared and benchmarked the assumptions used, such as the cost of capital, to externally derived data. We also used our knowledge of industry practice to challenge the Group's assumptions in these areas. Our actuarial experience: We used our own actuarial specialists to review and challenge the rationale for key assumptions adopted. Assessing transparency: We assessed whether the group's disclosure of the valuation of the investment in Phoenix adequately disclose the key judgements and potential estimation uncertainty in deriving the opening investment valuation. Our Results We found the initial valuation of the investment in Phoenix to be acceptable.

 

 

	The risk	Our response
Accounting for the obligations arising out of the disposal of SLAL and investment in Phoenix (continued) (Contingent consideration - Indemnities; 2017: Not applicable)   Refer to page 63 (Audit Committee Report), page 127, (accounting policy) and page 130 and 202 (financial disclosures).                               (Separation costs provision £80m; 2017: Not applicable)   Refer to page 63 (Audit Committee Report), page 126 (accounting policy) and page 138 (financial disclosures).	Subjective estimate - indemnities A number of indemnities were included in the SPA with Phoenix. The fair value of these have been estimated by management and recognised as contingent consideration. A number of these involved significant judgement as they relate to uncertain future events. The most significant of which relates to a potential future outflow relating to any loss suffered by SLAL above that already provided for in respect of the ongoing review of non-advised annuity sales. This is an area that involves significant judgement over the redress payable to customers.                         Subjective estimate - Provision for separation costs The calculation of the provision for separation costs arising out of the disposal of SLAL requires the Directors to determine a number of key inputs. The determination of these is judgemental and requires the Directors to consider a range of information connected to the Separation Plan. The most significant input of which is the costs that are estimated to relate to separating the business and which do not relate to costs related to SLA's ongoing business, including development of new systems. The risk is that the provision is misstated and includes future costs from which the group will derive ongoing benefit. The effect of these matters is that, as part of our risk assessment, we determined that the provision for separation costs has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 38) disclose the range estimated by the Group.	Our procedures included: Test of details: For a sample of indemnities, we reviewed the legal documents to assess the obligations arising out of the indemnity. We obtained evidence to support the valuation calculations made by management. Test of details: We assessed the judgements made in determining key assumptions such as eligibility rates, failure rates and average redress used to calculate the annuity sales provision and hence the contingent consideration. Our actuarial and tax experience: We used our own actuarial and tax specialists to review and challenge the approach taken to estimate certain indemnities. Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the calculation of the contingent consideration appropriately represent the sensitivity of the provision to the use of alternative assumptions. Our Results We found the carrying amount of the contingent consideration for indemnities to be acceptable.     Our procedures included: Test of details: We assessed the terms in the SPA and other documents to confirm that SLA has a legal obligation to pay for separation costs. Test of details: We sampled costs included in the Separation Plan and obtained evidence and explanations to validate whether they were appropriately provided for. Assessing transparency: We assessed whether the group's disclosures detailing separation costs to be incurred adequately disclose the potential expense for the Group, including the range of costs and potential estimation uncertainty. Our Results We found the estimate of the separation cost provision to be acceptable.

 

	The risk	Our response
Carrying value of investment in Phoenix (£812 million; 2017: Not applicable: Impairment £228m; 2017: Not applicable) Refer to page 63 (Audit Committee Report), page 152 (accounting policy) and page 153 (financial disclosures).	Subjective valuation At 31 December 2018, the market value of the investment in Phoenix was significantly below the carrying value. We consider this to be objective evidence of impairment per IAS 28. An impairment review was performed by management using a value in use approach. The key judgement was in selecting the appropriate approach for estimating the recoverable amount of the investment in Phoenix. After consideration of alternatives, management determined that the market value of Phoenix represented the best estimate of future dividends and therefore was used to calculate the value in use. An impairment charge of £228m was recognised.	Our procedures included: Assessing principles: We critically assessed management's approach to estimating the recoverable amount against other estimation methods permitted by IAS 28 and 36. Comparing valuations: We assessed reasons for the differences in value under use under the different methods. Our Results We found the valuation of the investment in Phoenix to be acceptable.

 

	The risk	Our response
Valuation of Intangible Assets (Customer relationships and investment management contracts: £633m, 2017: £774m) Refer to page 63 (Audit Committee Report), page 146 (accounting policy) and page 147 (financial disclosures).	Subjective Estimate The Group's intangible assets include customer relationships and investment management contracts. There is a risk of impairment to the carrying value of these intangible assets. Customer relationship and investment management contracts acquired through business combinations comprise £633 million of the intangible asset balance. The valuation of these intangible assets is subjective and requires the use of assumptions relating to future cash flows and the use of valuation models. In addition, management need to make subjective judgements when assessing whether there are any indicators of impairment to these intangible assets. The effect of these matters is that, as part of our risk assessment, we determined that the value in use of these assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (Note 14) disclose the sensitivity estimated by the Group.	Our procedures included: Our valuation expertise: We evaluated whether there are indicators of impairment that would trigger an impairment review. This included a critical assessment of the business performance, such as outflows of assets under management relating to each intangible asset. Where indicators were identified, we used our own valuation specialists to assist us in assessing the appropriateness the Group's valuation model. This included comparing the Group discount rate assumptions with our own estimate of a range of reasonable discount rates, based on comparable company information. Our sector experience: Where there was an indicator of impairment, we evaluated the appropriateness of assumptions applied in key inputs such as revenue from contracts with customers, operating costs and discount rates. Sensitivity analysis: Where there is an indicator of impairment, we performed our own sensitivity analysis which included assessing the effect of reasonably possible reductions in growth rates and forecast cash flows to evaluate the impact on current headroom. Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the valuation of management contract and customer relationship intangible assets appropriately represent the sensitivities of the asset valuations to the use of alternative assumptions. Our results We found the valuation of intangible assets to be acceptable (2017: acceptable).

 

	The risk	Our response
Valuation of the UK defined benefit pension scheme present value of funded obligation (£2,542m, 2017: £2,839m) Refer to page 63 (Audit Committee Report), page 178 (accounting policy) and page 180 (financial disclosures).	Subjective Valuation: The present value of the Group's funded obligation for the UK defined benefit pension scheme is an area that involves significant judgement over the uncertain future settlement value. The Group is required to use judgment in the selection of key assumptions covering both operating assumptions and economic assumptions. The key operating assumptions are base mortality and mortality improvement. The key economic assumptions are the discount rate and inflation. The risk is that inappropriate assumptions are used in determining the present value of the funded obligation. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the pension scheme obligation has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (Note 35) disclose the range estimated by the Group.	Our procedures included: Our actuarial experience: We used our own actuarial specialists to perform procedures in this area. Test of detail and our sector experience: We considered the appropriateness of the base mortality assumption by reference to scheme and industry data on historical mortality experience. We considered the appropriateness of the mortality improvement assumptions by reference to industry based expectations of future mortality improvements. We considered the appropriateness of the discount rate and inflation assumptions by reference to industry practice. Benchmarking assumptions and our sector experience: We utilised the results of KPMG benchmarking of base mortality, mortality improvement, discount rate and inflation assumptions and our knowledge of industry practice to inform our challenge of the Group's assumptions in these areas. Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the calculation of present value of the funded obligation appropriately represent the sensitivities of the obligation to the use of alternative assumptions. Our results We found the valuation of the UK defined benefit pension scheme obligation to be acceptable (2017: acceptable).

We continue to perform procedures over the valuation of internally generated software assets not yet available for use and the valuation of level 3 financial instruments and investment property. However, following the groups disposal of its UK and Europe insurance business, SLAL, in the period, we have not assessed either of these areas as one of the most significant risks in our current year audit and, therefore, they are not separately identified in our report.

In respect of level 3 financial instruments we note that the disposal of the group's UK and Europe insurance business has led to a significant reduction of £1.1bn in the Group's investment portfolio. The risk of material misstatement within the financial statements in respect of valuation of the remaining assets (£62m) is reduced. £311m of the internally generated software assets were within SLAL and following the disposal, the remaining assets balance is not considered to create the same risk of material misstatement.

Non-Participating insurance contract liabilities and the provision for annuity sales practice were both balances within the SLAL entity. The disposal has resulted in these being transferred to Phoenix and therefore neither are identified as individual key audit matters within our report this year. They are however both identified areas of significant risk within the accounting for the obligations arising out of the disposal of SLAL and investment in Phoenix.

3. Our application of materiality and an overview of the scope of our audit

Materiality for the group financial statements as a whole was set at £32m (2017: £38m), determined with reference to a benchmark of group profit before tax normalised to exclude impairment, to exclude restructuring costs, to exclude the profit on disposal of associates and the profit on disposal of the UK and Europe insurance business as disclosed in Note 14, Note 8, Note 16, and Note 10 respectively. Materiality represents 4.8% of normalised profit before tax.

Materiality for the parent company financial statements as a whole was set at £19m (2017:£17m), determined with reference to a benchmark of normalised profit before tax, of which it represents 3.6% (2017:4.9%).

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.6m, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Of the group's 75 (2017: 227, of which 160 were consolidated funds) continuing reporting components, we subjected 6 (2017: 19) to full scope audits for group purposes and 3 (2017: 13) to specified risk-focused audit procedures. The latter were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed. We conducted a review of financial information for one non-significant component (2017:1).

The components within the scope of our work accounted for the percentages illustrated opposite.

The remaining 16% of total group revenue, 22% of group profit before tax and 10% of total group assets is represented by 246 reporting components, none of which individually represented more than 5% of any of total group revenue, or total group assets. For these residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.

The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £2.0m to £20.8m, having regard to the mix of size and risk profile of the Group across the components.

The work on 8 of the 9 continuing components (2017: 32 of the 33 components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. The group team performed procedures on the items excluded from normalised group profit before tax.

4. We have nothing to report on going concern

The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations and as they have concluded that the Company's and the Group's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ('the going concern period').

Our responsibility is to conclude on the appropriateness of the Directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation.

In our evaluation of the Directors' conclusions, we considered the inherent risks to the Group's and Company's business model and analysed how those risks might affect the Group's and Company's financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group's and Company's available financial resources over this period were:

·  Movements in investment markets and assets under management

·  The impact of Brexit on the Group's revenues

As these were risks that could potentially cast significant doubt on the Group's and the Company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Group's financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts, such as the impact of Brexit, which could result in a rapid reduction of available financial resources.

Based on this work, we are required to report to you if:

·  We have anything material to add or draw attention to in relation to the directors' statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company's use of that basis for a period of at least 12 months from the date of approval of the financial statements

·  The related statement under the Listing Rules set out on page 49 is materially inconsistent with our audit knowledge

We have nothing to report in these respects, and we did not identify going concern as a key audit matter.

5. We have nothing to report on the other information in the Annual Report

The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge.
Based solely on that work we have not identified material misstatements in the other information.

Strategic report and directors' report

Based solely on our work on the other information

·  We have not identified material misstatements in the strategic report and the directors' report

·  In our opinion the information given in those reports for the financial year is consistent with the financial statements

·  In our opinion those reports have been prepared in accordance with the Companies Act 2006

Directors' remuneration report

In our opinion the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

·  The directors' confirmation within the viability statement page 39 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity

·  The Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated

·  The directors' explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions

Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group's and Company's longer-term viability.

Corporate governance disclosures

We are required to report to you if:

·  We have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy

·  The section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects.

6. We have nothing to report on the other matters on which we are required to report by exception

Under the Companies Act 2006, we are required to report to you if, in our opinion:

·  Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us

·  The parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns

·  Certain disclosures of directors' remuneration specified by law are not made

·  We have not received all the information and explanations we require for our audit

We have nothing to report in these respects.

7. Respective responsibilities

Directors' responsibilities

As explained more fully in their statement set out on page 103, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.

Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC's website at: www.frc.org.uk/auditorsresponsibilities

Irregularities - ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.

The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, taxation legislation and pension's regulations and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.

Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation.  We identified the following areas as those most likely to have such an effect: specific areas of regulatory capital and liquidity, conduct including client assets, money laundering, market abuse regulations and certain aspects of company legislation recognising the financial and regulated nature of the group's activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further rem oved non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8. The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

 

Jonathan Mills (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

Saltire Court

20 Castle Terrace Edinburgh

EH1 2EG

13 March 2019

8. Group financial statements

 

Consolidated income statement

For the year ended 31 December 2018

		2018	2017 restated1
	Notes	£m	£m
Income
Investment return	3	(116)	238
Revenue from contracts with customers	4	1,955	1,486
Insurance contract premium income	31	73	89
Profit on disposal of interests in associates	1	185	319
Other income		34	33
Total income from continuing operations		2,131	2,165
Expenses
Insurance contract claims and change in liabilities	31	1	201
Change in non-participating investment contract liabilities	32	(78)	74
Administrative expenses
Restructuring and corporate transaction expenses	8	231	162
Impairment of goodwill - Aberdeen Standard Investments	14	880	-
Other administrative expenses	5	1,746	1,295
Total administrative expenses		2,857	1,457
Change in liability for third party interest in consolidated funds		(5)	6
Finance costs		45	34
Total expenses from continuing operations		2,820	1,772
Share of profit from associates and joint ventures	16	130	45
Loss on impairment of interest in associates	16	(228)	-
(Loss)/profit before tax from continuing operations		(787)	438
Tax expense attributable to continuing operations	9	43	28
(Loss)/profit for the year from continuing operations		(830)	410
Profit for the year from discontinued operations	10	1,698	322
Profit for the year		868	732
Attributable to:
Equity holders of Standard Life Aberdeen plc
From continuing operations		(835)	402
From discontinued operations		1,665	297
Equity holders of Standard Life Aberdeen plc		830	699
Non-controlling interests
From continuing operations - preference shares and perpetual notes	30	5	8
From discontinued operations - ordinary shares	30	5	25
From discontinued operations - perpetual notes	30	28	-
		868	732
Earnings per share from continuing operations
Basic (pence per share)	11	(29.3)	17.1
Diluted (pence per share)	11	(29.3)	17.0
Earnings per share
Basic (pence per share)	11	29.1	29.8
Diluted (pence per share)	11	29.1	29.6

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

Consolidated statement of comprehensive income

For the year ended 31 December 2018

		2018	2017 restated1
	Notes	£m	£m
Profit for the year		868	732
Less: profit from discontinued operations		(1,698)	(322)
(Loss)/profit from continuing operations		(830)	410
Items that will not be reclassified subsequently to profit or loss:
Remeasurement losses on defined benefit pension plans	35	(29)	(18)
Share of other comprehensive income of associates and joint ventures	28	(15)	-
Equity holder tax effect of items that will not be reclassified subsequently to profit or loss	9	-	(10)
Total items that will not be reclassified subsequently to profit or loss		(44)	(28)
Items that may be reclassified subsequently to profit or loss:
Fair value gains/(losses) on cash flow hedges	29	54	(33)
Fair value losses on available-for-sale financial assets	29	(9)	-
Exchange differences on translating foreign operations	29	14	(31)
Share of other comprehensive income of associates and joint ventures	28	-	4
Items transferred to the consolidated income statement
Fair value (gains)/losses on cash flow hedges	21	(41)	13
Realised foreign exchange gains	1	(2)	(2)
Equity holder tax effect of items that may be reclassified subsequently to profit or loss	9	(1)	3
Total items that may be reclassified subsequently to profit or loss		15	(46)
Other comprehensive income for the year from continuing operations		(29)	(74)
Total comprehensive income for the year from continuing operations		(859)	336
Profit from discontinued operations		1,698	322
Other comprehensive income from discontinued operations	10	(43)	12
Total comprehensive income for the year from discontinued operations		1,655	334
Total comprehensive income for the year		796	670
Attributable to:
Equity holders of Standard Life Aberdeen plc
From continuing operations		(864)	328
From discontinued operations		1,622	309
Non-controlling interests
From continuing operations -- preference shares and perpetual notes		5	8
From discontinued operations - ordinary shares		5	25
From discontinued operations - perpetual notes		28	-
		796	670

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

Reconciliation of consolidated adjusted profit before tax to IFRS profit for the year

For the year ended 31 December 2018

		2018			2017 restated1
		Continuing operations	Discontinued operations	Total	Continuing operations	Discontinued operations	Total
	Notes	£m	£m	£m	£m	£m	£m
Adjusted profit before tax
Asset management and platforms		510	-	510	417	-	417
Insurance associates and joint ventures		140	-	140	58	-	58
UK and European insurance		-	210	210	-	379	379
Adjusted profit before tax	2	650	210	860	475	379	854
Adjusted for the following items
Restructuring and corporate transaction expenses	8	(239)	(264)	(503)	(162)	(11)	(173)
Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts	2	(1,155)	-	(1,155)	(138)	-	(138)
Provision for annuity sales practices	38	-	-	-	-	(100)	(100)
Profit on disposal of subsidiaries	1	-	1,780	1,780	-	-	-
Profit on disposal of interests in associates	1	185	-	185	319	-	319
Impairment of associates	16	(228)	-	(228)	-	-	-
Investment return variances and economic assumption changes	12	54	(41)	13	-	67	67
Other2		(14)	44	30	(15)	-	(15)
Total adjusting items	2	(1,397)	1,519	122	4	(44)	(40)
Share of associates' and joint ventures' tax expense	2	(40)	-	(40)	(41)	-	(41)
Profit attributable to non-controlling interests - ordinary shares	2	-	5	5	-	25	25
(Loss)/profit before tax expense3		(787)	1,734	947	438	360	798
Tax (expense)/credit attributable to
Adjusted profit	2	(95)	(77)	(172)	(77)	(31)	(108)
Adjusting items	2	52	41	93	49	(7)	42
Total tax expense		(43)	(36)	(79)	(28)	(38)	(66)
(Loss)/profit for the year		(830)	1,698	868	410	322	732

¹    Comparatives for 2017 have been restated to reflect changes in the reportable segments. Refer Note 2.

²    The Other adjusting item in 2018 relating to discontinued operations is a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of £44m. Following the classification of the UK and European insurance business as held for sale, no amortisation or depreciation was recognised in accordance with applicable financial reporting standards.

³    For discontinued operations profit before tax expense attributable to equity holders consists of profit before tax of £1,780m (2017: £526m) less tax expense attributable to policyholders' returns of £46m (2017: £166m).

The Group's key alternative performance measure is adjusted profit before tax. Refer Note 12 for further details.

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

Consolidated statement of financial position

As at 31 December 2018

		2018	2017
	Notes	£m	£m
Assets
Intangible assets	14	3,404	4,514
Deferred acquisition costs	15	6	612
Investments in associates and joint ventures accounted for using the equity method	16	1,444	503
Investment property	17	-	9,749
Property, plant and equipment	18	61	146
Pension and other post-retirement benefit assets	35	1,111	1,099
Deferred tax assets	9	61	65
Reinsurance assets	31	-	4,811
Loans	19	-	91
Derivative financial assets	19	21	3,053
Equity securities and interests in pooled investment funds	19	2,030	99,020
Debt securities	19	1,723	61,565
Receivables and other financial assets	19	708	1,242
Current tax recoverable	9	6	192
Other assets	23	40	185
Assets held for sale	24	762	1,038
Cash and cash equivalents	19	1,140	10,226
Total assets		12,517	198,111
Equity
Share capital	26	353	364
Shares held by trusts	27	(115)	(61)
Share premium reserve	26	640	639
Retained earnings	28	2,778	3,162
Other reserves	29	3,782	4,500
Equity attributable to equity holders of Standard Life Aberdeen plc		7,438	8,604
Non-controlling interests
Ordinary shares	30	2	289
Preference shares	30	99	99
Total equity		7,539	8,992
Liabilities
Non-participating insurance contract liabilities	31	3	22,740
Non-participating investment contract liabilities	32	1,468	105,769
Participating contract liabilities	31	-	30,647
Deposits received from reinsurers	33	-	4,633
Third party interest in consolidated funds	33	254	16,457
Subordinated liabilities	33	1,081	2,253
Pension and other post-retirement benefit provisions	35	38	78
Deferred income	36	75	157
Deferred tax liabilities	9	100	367
Current tax liabilities	9	23	166
Derivative financial liabilities	21	6	813
Other financial liabilities	33	1,162	3,896
Provisions	38	105	316
Other liabilities	38	6	121
Liabilities of operations held for sale	24	657	706
Total liabilities		4,978	189,119
Total equity and liabilities		12,517	198,111

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

The consolidated financial statements on pages 117 to 224 were approved by the Board and signed on its behalf by the following Directors:

Sir Douglas Flint	Bill Rattray
Chairman, 13 March 2019	Chief Financial Officer, 13 March 2019

 

 

Consolidated statement of changes in equity

For the year ended 31 December 2018

								Non-controlling interests
		Share capital	Shares held by trusts	Share premium reserve	Retained earnings	Other reserves	Total equity attributable to equity holders of Standard Life Aberdeen plc	Ordinary shares	Preference shares and perpetual debt instruments	Total equity
2018	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
1 January		364	(61)	639	3,162	4,500	8,604	289	99	8,992
(Loss)/profit for the year from continuing operations		-	-	-	(835)	-	(835)	-	5	(830)
Profit for the year from discontinued operations		-	-	-	1,665	-	1,665	5	28	1,698
Other comprehensive income for the year from continuing operations		-	-	-	(44)	15	(29)	-	-	(29)
Other comprehensive income for the year from discontinued operations		-	-	-	-	(43)	(43)	-	-	(43)
Total comprehensive income for the year	28, 29	-	-	-	786	(28)	758	5	33	796
Issue of share capital	26	-	-	1	-	-	1	-	-	1
Issue of B shares	26,29	1,000	-	-	-	(1,000)	-	-	-	-
Reclassification of perpetual debt instruments to equity	30	-	-	-	-	-	-	-	1,005	1,005
Repurchase of perpetual debt instruments	30	-	-	-	-	-	-	-	(970)	(970)
Redemption of perpetual debt instruments	30	-	-	-	-	-	-	-	(44)	(44)
Dividends paid on ordinary shares	13	-	-	-	(634)	-	(634)	-	-	(634)
Dividends paid on preference shares		-	-	-	-	-	-	-	(5)	(5)
Coupons paid on perpetual debt instruments		-	-	-	-	-	-	-	(25)	(25)
Redemption of B shares	26, 28	(1,000)	17	-	(1,002)	1,000	(985)	-	-	(985)
Shares bought back on-market and cancelled	26, 28,29	(11)	-	-	(238)	11	(238)	-	-	(238)
Other movements in non-controlling interests in the year		-	-	-	-	-	-	(292)	-	(292)
Reserves credit for employee share-based payments	29	-	-	-	-	36	36	-	-	36
Transfer to retained earnings for vested employee share-based payments	28, 29	-	-	-	68	(68)	-	-	-	-
Transfer between reserves on disposal of subsidiaries	1	-	-	-	99	(99)	-	-	-	-
Transfer between reserves on impairment of subsidiaries		-	-	-	570	(570)	-	-	-	-
Shares acquired by employee trusts		-	(100)	-	-	-	(100)	-	-	(100)
Shares distributed by employee and other trusts and related dividend equivalents	28	-	29	-	(33)	-	(4)	-	-	(4)
Aggregate tax effect of items recognised directly in equity	9	-	-	-	-	-	-	-	6	6
31 December		353	(115)	640	2,778	3,782	7,438	2	99	7,539

 

 

								Non-controlling interests
		Share capital	Shares held by trusts	Share premium reserve	Retained earnings	Other reserves	Total equity attributable to equity holders of Standard Life Aberdeen plc	Ordinary shares	Preference shares and perpetual notes	Total equity
2017	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
1 January		242	(2)	634	2,855	618	4,347	297	-	4,644
Profit for the year from continuing operations		-	-	-	402	-	402	-	8	410
Profit for the year from discontinued operations		-	-	-	297	-	297	25	-	322
Other comprehensive income for the year from continuing operations		-	-	-	(24)	(50)	(74)	-	-	(74)
Other comprehensive income for the year from discontinued operations		-	-	-	-	12	12	-	-	12
Total comprehensive income for the year	28, 29	-	-	-	675	(38)	637	25	8	670
Issue of share capital	26, 27, 29	122	(3)	5	-	3,877	4,001	-	-	4,001
Dividends paid on ordinary shares	13	-	-	-	(469)	-	(469)	-	-	(469)
Coupons paid on perpetual notes		-	-	-	-	-	-	-	(13)	(13)
Non-controlling interests acquired through business combinations		-	-	-	-	-	-	-	501	501
Reclassification of perpetual notes to liability	30	-	-	-	19	-	19	-	(399)	(380)
Other movements in non-controlling interests in the year		-	-	-	-	-	-	(33)	-	(33)
Reserves credit for employee share-based payments	29	-	-	-	-	96	96	-	-	96
Transfer to retained earnings for vested employee share-based payments	28, 29	-	-	-	86	(54)	32	-	-	32
Shares acquired by employee trusts		-	(61)	-	-	-	(61)	-	-	(61)
Shares distributed by employee and other trusts and related dividend equivalents	28	-	5	-	(8)	-	(3)	-	-	(3)
Sale of shares held by trusts		-	-	-	4	-	4	-	-	4
Aggregate tax effect of items recognised directly in equity	9	-	-	-	-	1	1	-	2	3
31 December		364	(61)	639	3,162	4,500	8,604	289	99	8,992

 

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

Consolidated statement of cash flows

For the year ended 31 December 2018

		2018	2017
	Notes	£m	£m
Cash flows from operating activities
(Loss)/profit before tax from continuing operations		(787)	438
Profit before tax from discontinued operations	10	1,780	526
		993	964
Change in operating assets	42	3,317	1,351
Change in operating liabilities	42	(2,551)	(84)
Adjustment for non-cash movements in investment income		(80)	40
Change in unallocated divisible surplus	31	(48)	140
Other non-cash and non-operating items	42	(581)	3
Taxation paid		(224)	(220)
Net cash flows from operating activities		826	2,194
Cash flows from investing activities
Purchase of property, plant and equipment	18	(28)	(37)
Proceeds from sale of property, plant and equipment		1	-
(Acquisition)/ disposal of seeding investments		(4)	19
Acquisition of subsidiaries and unincorporated businesses net of cash acquired		(33)	495
Disposal of subsidiaries net of cash disposed of	42	(5,501)	-
Acquisition of investments in associates and joint ventures	16	(72)	-
Disposal of investments in associates and joint ventures	1	180	359
Purchase of intangible assets		(128)	(69)
Net cash flows from investing activities		(5,585)	767
Cash flows from financing activities
Repayment of other borrowings		(2)	(1)
Proceeds from issue of subordinated liabilities		-	565
Repayment of subordinated liabilities and perpetual notes		(1,377)	-
Capital flows to third party interest in consolidated funds and non-controlling interests - ordinary shares		(507)	(1,011)
Distributions paid to third party interest in consolidated funds and non-controlling interests - ordinary shares		(69)	(109)
Shares acquired by trusts		(100)	(61)
Sale of shares held by trusts		-	4
Proceeds from issue of shares	26	1	5
Interest paid		(117)	(97)
Return of cash to shareholders under B share scheme	26	(983)	-
Shares bought back on-market and cancelled	26	(238)	-
Preference dividends paid		(5)	-
Ordinary dividends paid	13	(634)	(469)
Net cash flows from financing activities		(4,031)	(1,174)
Net (decrease)/increase in cash and cash equivalents		(8,790)	1,787
Cash and cash equivalents at the beginning of the year		9,715	7,900
Effects of exchange rate changes on cash and cash equivalents		32	28
Cash and cash equivalents at the end of the year	25	957	9,715
Supplemental disclosures on cash flows from operating activities
Interest paid		6	4
Interest received		1,118	1,710
Dividends received		1,545	2,086
Rental income received on investment property		329	503

 

The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.

Presentation of consolidated financial statements

The Group's significant accounting policies are included at the beginning of the relevant notes to the consolidated financial statements. This section sets out the basis of preparation, a summary of the Group's critical accounting estimates and judgements in applying accounting policies, and other significant accounting policies which have been applied to the financial statements as a whole.

(a)     Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee (IFRICs), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of investment property, owner occupied property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss (FVTPL).

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

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

The Group has adopted the following new International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), interpretations and amendments to existing standards, which are effective by EU endorsement for annual periods beginning on or after 1 January 2018:

IFRS 15 Revenue from Contracts with Customers

IFRS 15 replaces IAS 18 Revenue and provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. The Group's revenue generated from the following contracts is exempt from this standard:

·  Lease contracts within the scope of IAS 17 Leases

·  Insurance contracts within the scope of IFRS 4 Insurance Contracts

·  Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments 

The adoption of this standard has had no significant impact on the timing of revenue recognition of the Group and therefore no restatement of prior periods was required. The Group did not use any of the practical expedients permitted under IFRS 15.

The Group's accounting policy for revenue within the scope of IFRS 15 has been updated to state that revenue is recognised as performance obligations are satisfied.

The standard introduces a number of new disclosure requirements which are provided in Note 4 of these financial statements. These include disclosures around:

·  The nature of the performance obligations within contracts with customers

·  Disaggregated revenue and its relationship with revenue reported for each reportable segment

·  Contract asset and liabilities

There are no judgements that significantly affect the determination of the amount and timing of revenue from contracts with customers.

Revenue from contracts with customers from continuing operations for the year ended 31 December 2017 consists of £1,479m which was previously presented as fee income, and £7m that was previously presented as other income on the face of the consolidated income statement.

The standard requires the incremental cost of obtaining contracts with customers to be recognised as an asset where it is expected that these costs will be recovered. These costs have been included as an intangible asset and are shown in Note 14.

Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

The amendments address the consequences of the different effective dates of IFRS 9 and the new insurance contracts standard, IFRS 17. Insurers are permitted to defer implementation of IFRS 9 until periods beginning on or after 1 January 2021 (which is expected to be amended to 1 January 2022) if they satisfy criteria regarding the predominance of their insurance activities, or to apply an overlay approach to remove incremental volatility from the income statement. At 31 December 2015 the Group's liabilities arising from contracts within the scope of IFRS 4 and liabilities connected with insurance as a percentage of total liabilities were 32% and in excess of 96% respectively:

	31/12/2015 £m	Liabilities in scope of IFRS 4 £m	Liabilities connected to insurance £m
Non-participating insurance contract liabilities	21,206	21,206	21,206
Non-participating investment contract liabilities	92,894	-	92,894
Participating contract liabilities	29,654	29,654	29,654
Deposits received from reinsurers	5,134	5,134	5,134
Third party interest in consolidated funds	17,196	-	17,196
Other liabilities	6,289	-	-
Total liabilities	172,373	55,994	166,084
		32%	96%

Therefore the Group was eligible to defer the implementation of IFRS 9. Following the merger with Aberdeen Asset Management PLC, the predominance of insurances activities was reassessed as at 31 December 2017. The Group remained eligible to defer and has opted to defer implementation of IFRS 9 in these consolidated financial statements. Further disclosures required as a result of this deferral are set out in Note 16 and Note 19.

Interpretations and amendments to other standards

·  IFRIC 22 Foreign Currency Transactions and Advanced Consideration

·  Amendments to IFRS 2 Share-based payment: Classification and Measurement of Share-based payment transactions

·  Amendments to IAS 40 Investment Property: Transfers of Investment Property

·  Annual Improvements 2014-2016 cycle

The Group's accounting policies have been updated to reflect these. Management considers the implementation of the above interpretations and amendments to existing standards has had no significant impact on the Group's financial statements.

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

Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group's annual accounting periods beginning after 1 January 2018. The Group has not early adopted the standards, amendments and interpretations described below:

IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019)

IFRS 16 replaces IAS 17 Leases and introduces a new single accounting approach for lessees for all leases (with limited exceptions). As a result there is no longer a distinction between operating leases and finance leases, and lessees will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The accounting for leases by lessors remains largely unchanged.

The Group has adopted IFRS 16 on 1 January 2019, and will use the cumulative catch up approach. The Group intends to use the 'practical expedients' available to apply the new standard solely to leases previously identified in accordance with IAS 17 and IFRIC 4 Determining whether an Arrangement Contains a Lease, to not recognise leases with a low value or whose term ends within 12 months of the date of initial application (1 January 2019), to apply a single discount rate to leases with similar characteristics and the use of IAS 37 Provisions, Contingent Liabilities and Contingent Assets relating to onerous leases.

As a result of IFRS 16, assets leased by the Group will be brought onto the statement of financial position at inception of a lease. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability recognised in the income statement. The present value of the lease liability takes into account prepayments and incentives and will be measured using the incremental borrowing rate.

The main impact on the Group of the standard will be for property that the Group leases for use as office space which is currently classified as operating leases. The Group estimates that for this property portfolio it will recognise additional right of use assets of approximately £194m and additional lease liabilities of approximately £223m as at 1 January 2019. The cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. No significant profit impact is expected.

IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2019 for the Group)

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows two measurement categories for financial assets in the statement of financial position: amortised cost and fair value. All equity instruments and derivative instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows are solely payments of principal and interest, otherwise it is classified at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL) depending on the business model it is held within or whether the option to adopt FVTPL has been applied. Changes in value of all equity instruments and derivative instruments are recognised in profit or loss unless an OCI presentation election is made at initial recognition for an equity instrument or a derivative instrument is designated as a hedging instrument in a cash flow hedge. IFRS 9 also introduces a new impairment model, an expected credit loss model which will replace the current incurred loss model in IAS 39. An impairment loss will now be recognised prior to a loss event occurring. Accounting for financial liabilities remains the same as under IAS 39 except that for financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability's credit risk are recognised in OCI.

Additionally IFRS 9 amends the current requirements for assessing hedge effectiveness in IAS 39 and also amends what qualifies as a hedged item and some of the restrictions on what qualifies as a hedging instrument. The accounting and presentation requirements for designated hedging relationships remain largely unchanged. IFRS 9 contains an election to continue to apply the hedge accounting requirements of IAS 39.

As well as presentation and measurement changes, IFRS 9 also introduces additional disclosure requirements.

As noted in (a)(i) above, the Group was eligible to defer and has opted to defer implementation of IFRS 9 in these consolidated financial statements. On 31 August 2018, the Group disposed of the UK and European insurance business (refer Note 1 for further details). Following the sale, the Group no longer has significant liabilities within the scope of IFRS 4 and is required to adopt IFRS 9 on or before 1 January 2020. The Group has adopted IFRS 9 on 1 January 2019. The Group has elected to continue applying the hedge accounting requirements of IAS 39.

At 31 December 2018, the Group has available-for-sale debt securities with a fair value of £862m with a corresponding available-for-sale financial assets reserve balance of £7m and deferred tax liability of £1m. On adoption of IFRS 9, these debt securities will be recognised at 1 January 2019 at their amortised cost (less expected credit losses) of £854m. The available-for-sale financial assets reserve balance and the related deferred tax liability will no longer be recognised. The expected credit losses at 1 January 2019 are less than £1m.

At 31 December 2018, the Group also had subordinated liabilities of £1,081m. Under IFRS 9, where the terms of a financial liability are modified and the modification does not result in the derecognition of the liability, the liability is adjusted to the net present value of the future cash flows less transaction costs with a modification gain or loss recognised in the income statement. During the year ended 31 December 2018, the terms of the 4.25% US Dollar fixed rate subordinated notes were modified (refer Note 34). Consequently, on adoption of IFRS 9, these subordinated liabilities will be recognised at 1 January 2019 at a revised amortised cost of £1,086m. The impact on retained earnings will be £5m.

The adoption of IFRS 9 will not significantly impact the other financial assets and liabilities which are currently measured at FVTPL or amortised cost in accordance with IAS 39, and will have no significant impact on profit.

The Company and a number of subsidiaries adopted IFRS 9 at 1 January 2018 for their separate financial statements. The Company's financial statements can be found in Section 9. The financial statements of UK subsidiaries which have adopted IFRS 9 including Standard Life Investments Limited, Aberdeen Asset Management PLC and Standard Life Savings Limited will be available from Companies House.

IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021), expected to be amended to 1 January 2022

IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts. IFRS 4 is an interim standard which permits the continued application of accounting policies, for insurance contracts and contracts with discretionary participation features, which were being used at transition to IFRS except where a change satisfies criteria set out in IFRS 4. IFRS 17 introduces new required measurement and presentation accounting policies for such contracts which reflect the view that these contracts combine features of a financial instrument and a service contract.

IFRS 17's measurement model, which applies to groups of contracts, combines a risk-adjusted present value of future cash flows and an amount representing unearned profit. On transition retrospective application is required unless impracticable, in which case either a modified retrospective approach or a fair value approach is required. IFRS 17 introduces a new approach to presentation in the income statement and statement of comprehensive income.

Following the sale of the UK and European insurance business, the Group has limited direct exposure to insurance contracts and contracts with discretionary participating features which will be impacted by the adoption of IFRS 17. However, the results of the Group's insurance associates, Phoenix and HDFC Life, are expected to be significantly impacted by IFRS 17. The standard has not yet been endorsed by the EU.

Other

IFRIC 23: Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019)

IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes. The Interpretation addresses issues relating to uncertain tax treatments. An uncertain tax treatment is a tax treatment for which there is uncertainty over whether the relevant tax authority will accept the tax treatment under tax law. A tax treatment is the treatment used or planned to be used in an entities income tax filings.

The Group adopted IFRIC 23 on 1 January 2019. The clarifications set out in IFRIC 23 have not had a material impact on the Group's financial statements.

There are no other new standards, interpretations and amendments to existing standards that have been published that are expected to have a significant impact on the consolidated financial statements of the Group.

(a)(iii)  Critical accounting estimates and judgements in applying accounting policies

The preparation of financial statements requires management to exercise judgements in applying accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses arising during the year. Judgements and sources of estimation uncertainty 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 have the most significant effect on the amounts recognised in the consolidated financial statements are as follows:

Financial statement area	Critical judgements in applying accounting policies	Related note
Defined benefit pension plans	Assessment of whether the Group has an unconditional right to a refund of the surplus Treatment of tax relating to the surplus	Note 35
Investments in associates	Determining whether the investment in Phoenix should be classified as an associate Identification, valuation and determination of useful lives for equity accounting purposes, of the Group's share of its associate's intangible assets at the date of acquisition of an investment in the associate	Note 16
Intangible assets	Identification and valuation of intangible assets arising from business combinations Determining the group of cash-generating units to which goodwill acquired in a business combination should be allocated	Note 14
Provisions	Determining whether a provision is required for separation costs	Note 38

During the year to 31 December 2018 the following changes have been made to critical judgements in applying accounting policies:

·  We have identified critical judgements in applying accounting policies for investments in associates, for determining the cash-generating units to which goodwill acquired in a business combination should be allocated and for determining whether a provision should be recognised for separation costs

·  As a result of the disposal of the UK and European insurance business the judgements in applying the accounting policies for the classification of insurance, reinsurance and investment contracts and for the assessment of control or significant influence of structured entities are no longer considered to be critical judgements as these judgements only impact the presentation of amounts within discontinued operations. The assessment of whether the group has a contingent liability in relation to conduct matters is no longer considered to be a critical judgement.

There are no other changes to critical judgements from the prior year.

The areas where assumptions and other sources of estimation uncertainty at the end of the reporting period have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

Financial statement area	Critical accounting estimates and assumptions	Related note
Financial instruments at fair value through profit or loss	Determination of the fair value of contingent consideration assets and liabilities	Notes 19, 37 and 41
Defined benefit pension plans	Determination of principal UK pension plan assumptions for mortality, discount rate and inflation	Note 35
Intangible assets	Determination of useful lives Determination of the recoverable amount in relation to impairment assessment of goodwill, customer relationships and investment management contract intangibles	Note 14
Investments in associates	Determination of the recoverable amount in relation to the impairment assessment of investments in associates	Note 16

The following changes have been made to critical accounting estimates and assumptions as a result of the disposal of the UK and European insurance business and the acquisition of an interest in Phoenix:

·  We have identified estimates used in relation to the recoverable amount of investments in associates accounted for using the equity method as a critical area of estimation uncertainty

·  We have also identified the valuation of contingent consideration assets and liabilities relating to the disposal as a critical area of estimation uncertainty

·  We have removed the critical estimates and assumptions related to the valuation of participating contracts, non-participating contracts and reinsurance contracts, investment property, level 3 private equity investments and debt securities, and the measurement of the provision for annuity sales practices. These assumptions and estimates have been removed as they primarily related to the UK and European insurance business.

All other critical accounting estimates and assumptions are the same as the prior year.

Further detail on critical accounting estimates and assumptions is provided in the relevant note.

 (a)(iv) Foreign currency translation

The consolidated financial statements are presented in million pounds Sterling.

The statements of financial position of Group entities, including associates and joint ventures accounted for using the equity method, 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 other comprehensive income and the foreign currency translation reserve in equity. On disposal of a Group entity the cumulative amount of any such exchange differences recognised in other comprehensive income is reclassified to profit or loss.

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 relevant line in the consolidated income statement.

Translation differences on non-monetary items, such as equity securities held at fair value through profit or loss, are reported as part of the fair value gain or loss within net investment return in the consolidated income statement. Translation differences on financial assets and liabilities held at amortised cost are included in the relevant line in the consolidated income statement.

The income statements and cash flows, and statements of financial position of Group entities that have a different functional currency from the Group's presentation currency have been translated using the following principal exchange rates:

	2018		2017
	Income statement and cash flows (average rate)	Statement of financial position (closing rate)	Income statement and cash flows (average rate)	Statement of financial position (closing rate)
Euro	1.129	1.114	1.145	1.126
US Dollar	1.333	1.274	1.297	1.353
Indian Rupee	90.711	88.913	84.474	86.341
Chinese Renminbi	8.818	8.744	8.753	8.809
Hong Kong Dollar	10.444	9.971	10.104	10.575
Singapore Dollar	1.795	1.736	1.787	1.808

(b)     Basis of consolidation

The Group's financial statements consolidate the financial statements of the Company and its subsidiaries.

Subsidiaries are all entities (including investment vehicles) over which the Group has control. Control arises when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. For operating entities this generally accompanies a shareholding of 50% or more in the entity. For investment vehicles, including structured entities, the control assessment also considers the removal rights of other investors and whether the Group acts as principal or agent in assessing the link between power and variable returns. In determining whether the Group acts as principal, and therefore controls the entity, the removal rights of other investors and the magnitude of the variability associated with the returns are also taken into account. As a result, the Group often is considered to control investment vehicles in which its shareholding is less than 50%.

Where the Group is considered to control an investment vehicle, such as an open-ended investment company, a unit trust or a limited partnership, and it is therefore consolidated, the interests of parties other than the Group are assessed to determine whether they should be classified as liabilities or as non-controlling interests. The liabilities are recognised in the third party interest in consolidated funds line in the consolidated statement of financial position and any movements are recognised in the consolidated income statement. The financial liability is designated at fair value through profit or loss (FVTPL) as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets. The interests of parties other than the Group in all other types of entities are recorded as non-controlling interests.

All intra-group transactions, balances, income and expenses are eliminated in full.

The Group uses the acquisition method to account for acquisitions of businesses. At the acquisition date the assets and liabilities of the business acquired and any non-controlling interests are identified and initially measured at fair value on the consolidated statement of financial position.

When the Group acquires or disposes of a subsidiary, the profits and losses of the subsidiary are included from the date on which control was transferred to the Group until the date on which it ceases, with consistent accounting policies applied across all entities throughout.

When the Group sells a subsidiary to an associate, the gain on sale of the subsidiary is recognised in full, with no elimination being made for the continuing interest in the subsidiary.

Notes to the Group financial statements

1.     Group structure

(a)     Composition

The following diagram is an extract of the Group structure at 31 December 2018 and gives an overview of the composition of the Group.

Chart removed for the purposes of this announcement.  However it can be viewed in full in the pdf document.

A full list of the Company's subsidiaries is provided in Note 49.

(b)     Acquisitions

(b)(i)    Subsidiaries

On 27 April 2018, Aberdeen Asset Management Inc. purchased the US business of specialist commodity exchange traded product provider ETF Securities by purchasing the entire members' interests of ETF Securities USA LLC, ETF Securities (US) LLC and ETF Securities Advisers LLC. The acquisition broadens Aberdeen Standard Investments' suite of investment capabilities with the addition of a range of commodity-based Exchange Traded Funds. It also provides the platform and expertise to enable Aberdeen Standard Investments to grow its existing Smart Beta capability by launching strategies within an Exchange Traded Fund vehicle structure.

At the acquisition date the consideration, net assets acquired and resulting goodwill from the ETF Securities acquisition were as follows:

27 April 2018		£m1
Cash		27
Fair value of earn-out payment		8
Consideration		35
Fair value of net assets acquired
Customer-related intangible assets		28
Receivables and other financial assets		1
Cash and cash equivalents		1
Total assets		30
Other financial liabilities		2
Total liabilities		2
Goodwill		7

¹    The fair value of the earn-out payment of £8m has been calculated by reference to revenue retention and increases in assets under management and could range from £nil to £10m. 

Customer-related intangible assets relate to the existing customer relationships in place at the acquisition date. The full amount of the goodwill is expected to be deductible for tax purposes.

The amounts of revenue from contracts with customers and profit contributed to the Group's consolidated income statement for the year ended 31 December 2018 from the acquired ETF Securities business were £5m and £nil respectively. The profit contributed excludes amortisation of intangible assets acquired through business combinations. If the acquisition had occurred on 1 January 2018, the Group's total revenue from contracts with customers for the period would have increased by £3m to £1,958m and the profit would have remained unchanged.

During the year, the Group's UK wide financial advice business, 1825, completed the purchase of the entire share capital of Fraser Heath Financial Management Ltd and Cumberland Place Financial Management Ltd on 1 March 2018 and 6 April 2018 respectively. The combined assets under advice totalled £750m at the respective acquisition dates.

(b)(ii)   Prior year acquisition

On 6 March 2017, the boards of Standard Life plc and Aberdeen Asset Management PLC (Aberdeen) announced that they had reached agreement on the terms of a recommended merger of Standard Life and Aberdeen, through the acquisition by Standard Life of the entire issued ordinary share capital of Aberdeen, to be effected by means of a court-sanctioned scheme of arrangement between Aberdeen and Aberdeen shareholders under Part 26 of the Companies Act 2006. The merger completed on 14 August 2017 and Standard Life plc was renamed Standard Life Aberdeen plc.

(c)     Disposals

(c)(i)  Subsidiaries

UK and European insurance business

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business to Phoenix (the Sale), conditional on shareholder and relevant regulatory approvals. The Sale was completed on 31 August 2018 and was implemented by the sale to Phoenix of the entire issued share capital of Standard Life Assurance Limited (SLAL).

Under the transaction the following businesses were retained by the Group:

·  UK retail platforms, including Wrap and Elevate

·  1825, our financial advice business

In addition, the assets and liabilities of both the UK and Ireland Standard Life staff defined benefit pension plans were retained by the Group.

Total consideration received comprised cash of £2.0bn, a dividend received from SLAL of £312m in March 2018 and new shares issued at completion representing approximately 19.98% of the then issued share capital of Phoenix. The shareholding in Phoenix is subject to a lock-up of 12 months from completion. Following the announcement on 23 February 2018 the UK and European insurance business was classified as held for sale and measured at its carrying amount. The results of the UK and European insurance business to 31 August 2018 have been classified as discontinued operations. Refer Note 10. The Group recognised a gain on disposal in respect of the Sale which is included in profit from discontinued operations in the consolidated income statement for the year ended 31 December 2018.

The gain on sale was calculated as follows:

		£m
Total assets of operations disposed of		(180,444)
Total liabilities of operations disposed of		179,374
Net assets of operations disposed of		(1,070)
Cash consideration less transaction and separation costs		1,854
Non-cash consideration - Phoenix shares		1,023
Contingent consideration		8
Deferred income		(78)
Release of foreign currency translation reserve		43
Gain on sale		1,780

 

A breakdown of the assets and liabilities disposed of is provided in Note 42(d). Refer to Note 4(b) relating to deferred income and Note 38 relating to separation costs.

The gain on sale was exempt from tax under UK tax legislation.

The following additional reserve releases were made as a result of the sale. These releases were taken directly to retained earnings.

		£m
Reserve arising on Group reconstruction		(1,194)
Merger reserve		1,290
Revaluation of owner occupied property reserve		3
		99

(c)(ii) Associates

HDFC Asset Management Company Limited (HDFC AMC)

Profit on disposal of interests in associates for the year ended 31 December 2018 of £185m includes £177m in relation to the HDFC AMC initial public offering (IPO).

HDFC AMC, the Group's associate Indian asset management business announced in November 2017 that its board of directors had approved initiation of an IPO with the Group offering up a portion of the paid up capital of HDFC AMC. On 6 August 2018, HDFC AMC listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of the IPO. Through the IPO, the Group sold 16,864,585 equity shares in HDFC AMC for a total net consideration of Rs.16,212m (£180m). The Group's shareholding in HDFC AMC at 31 December 2018 is 63,650,615 equity shares or 29.96% of the issued share capital of HDFC AMC. The gain on sale from the IPO of £177m (£156m after tax) was calculated using the weighted-average cost method. On disposal £2m was recycled from the translation reserve and was included in determining the gain on sale.

(c)(iii)  Prior year disposal

HDFC Life Insurance Company Limited (HDFC Life)

Profit on disposal of interests in associates for the year ended 31 December 2017 of £319m includes £302m in relation to the HDFC Life IPO.

On 17 November 2017, HDFC Life listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of an IPO. Through the IPO, the Group sold 108,581,768 equity shares in HDFC Life for a total consideration of Rs 31,489m (£359m). The Group's shareholding in HDFC Life at 31 December 2018 is 589,626,265 equity shares or 29.23% of the issued share capital of HDFC Life. The gain on sale of £302m was calculated using the weighted-average cost method. On disposal £2m was recycled from the translation reserve and was included in determining the gain on sale.

2.     Segmental analysis

The Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed. IFRS 8 Operating Segments requires that the information presented in the financial statements is based on information provided to the 'Chief Operating Decision Maker'. The Chief Operating Decision Maker for the Group is the executive committee.

(a)     Basis of segmentation

The Group's reportable segments are as follows:

Continuing operations:

Asset management and platforms

This segment primarily relates to our asset management and platform businesses. Aberdeen Standard Investments and its asset management associate in India, HDFC AMC, provide a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. The segment includes the Group's three UK adviser platform businesses; Wrap and Elevate which are Standard Life branded, and the Parmenion digital platform; which provide administration services to advisers. The segment also includes other wholly owned activities of the Group including the 1825 financial planning and advice business, corporate centre and related activities and the UK and Ireland Standard Life staff defined benefit pension plans.

Insurance associates and joint ventures

This segment comprises our life insurance associates and joint ventures in India (HDFC life), the UK (Phoenix) and China (HASL). These businesses offer a range of pension, insurance and savings products to the Indian, UK, European and Chinese markets. Phoenix is also the largest life and pensions consolidator in Europe.

Discontinued operations:

UK and European insurance

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business. Refer to Note 1 for further details. As a consequence, the results of this business have been presented as discontinued operations. The UK and European insurance business provided a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.

Changes to reporting segments

As noted above, the segments are based on information provided to the executive committee. Previously management information was provided separately for our asset management business and our pensions and savings business. Following the completion of the sale of the UK and European insurance business, the Group is being managed as a single company and this is reflected in our new combined Asset management and platforms segment. HDFC Life and HASL, which were previously reported in the India and China life segment, are included in the Insurance associates and joint ventures segment together with Phoenix.

Comparative amounts for the 12 months ended 31 December 2017 have been prepared on the same basis as 31 December 2018 to allow more meaningful comparison.

(b)     Reportable segments - Group adjusted profit before tax and revenue information

(b)(i) Analysis of Group adjusted profit before tax

Adjusted profit before tax is the key alternative performance measure utilised by the Group's management in their evaluation of segmental performance and is therefore also presented by reportable segment.

		Asset management and platforms	Insurance associates and joint ventures	Total continuing operations	Discontinued operations	Eliminations	Total
31 December 2018	Notes	£m	£m	£m	£m	£m	£m
Fee based revenue		1,868	-	1,868	532	(94)	2,306
Spread/risk margin		-	-	-	59	-	59
Total adjusted operating income		1,868	-	1,868	591	(94)	2,365
Total adjusted operating expenses		(1,395)	-	(1,395)	(376)	94	(1,677)
Adjusted operating profit		473	-	473	215	-	688
Capital management		(9)	-	(9)	(5)	-	(14)
Share of associates' and joint ventures' profit before tax1		46	140	186	-	-	186
Adjusted profit before tax		510	140	650	210	-	860
Tax on adjusted profit		(95)	-	(95)	(77)	-	(172)
Share of associates' and joint ventures' tax expense	9	(17)	(26)	(43)	-	-	(43)
Adjusted profit after tax		398	114	512	133	-	645
Adjusted for the following items
Restructuring and corporate transaction expenses	8	(231)	(8)	(239)	(264)	-	(503)
Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts2		(1,117)	(38)	(1,155)	-	-	(1,155)
Profit on disposal of subsidiaries	1	-	-	-	1,780	-	1,780
Profit on disposal of interests in associates	1	183	2	185	-	-	185
Impairment of associates		-	(228)	(228)	-	-	(228)
Investment return variances and economic assumption changes	12	-	54	54	(41)	-	13
Other		4	(18)	(14)	44	-	30
Total adjusting items		(1,161)	(236)	(1,397)	1,519	-	122
Tax on adjusting items		52	-	52	41	-	93
Share of associates' and joint ventures' tax expense on adjusting items		2	1	3	-	-	3
Profit attributable to non-controlling interests (preference shares and perpetual notes)		(5)	-	(5)	(28)	-	(33)
(Loss)/profit for the year attributable to equity holders of Standard Life Aberdeen plc		(714)	(121)	(835)	1,665	-	830
Profit attributable to non-controlling interests
Ordinary shares				-	5		5
Preference shares and perpetual notes				5	28		33
(Loss)/profit for the year				(830)	1,698		868

¹    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Life, HDFC AMC, Phoenix and Heng An Standard Life Insurance Company Limited.

²    Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts includes £1,117m included in administrative expenses and set out in Note 14, and £38m relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the consolidated income statement.

Each reportable segment reports total adjusted operating income as its measure of revenue in its analysis of adjusted profit before tax. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes.

Adjusted operating income relates to revenues generated from external customers with the exception of £94m (2017: £136m) included within the Asset management and platforms segment which relates to investment management fees arising from intra-group transactions with the UK and European insurance segment classified as discontinued operations. At a Group level an elimination adjustment is required to remove intra-group impacts.

There are no customers whose revenue represents greater than 10% of fee based revenue.

		Asset management and platforms	Insurance associates and joint ventures	Total continuing operations	Discontinued operations	Eliminations	Total
31 December 2017	Notes	£m	£m	£m	£m	£m	£m
Fee based revenue		1,447	-	1,447	800	(136)	2,111
Spread/risk margin		-	-	-	165	-	165
Total adjusted operating income		1,447	-	1,447	965	(136)	2,276
Total adjusted operating expenses		(1,084)	-	(1,084)	(579)	136	(1,527)
Adjusted operating profit		363	-	363	386	-	749
Capital management		13	-	13	(7)	-	6
Share of associates' and joint ventures' profit before tax1		41	58	99	-	-	99
Adjusted profit before tax		417	58	475	379	-	854
Tax on adjusted profit		(77)	-	(77)	(31)	-	(108)
Share of associates' and joint ventures' tax expense	9	(29)	(12)	(41)	-	-	(41)
Adjusted profit after tax		311	46	357	348	-	705
Adjusted for the following items
Restructuring and corporate transaction expenses	8	(162)	-	(162)	(11)	-	(173)
Amortisation and impairment of intangible assets acquired in business combinations2		(125)	(13)	(138)	-	-	(138)
Provision for annuity sales practices	38	-	-	-	(100)	-	(100)
Profit on disposal of interests in associates	1	14	305	319	-	-	319
Investment return variances and economic assumption changes	12	-	-	-	67	-	67
Other		(15)	-	(15)	-	-	(15)
Total adjusting items		(288)	292	4	(44)	-	(40)
Tax on adjusting items		49	-	49	(7)	-	42
Profit attributable to non-controlling interests (preference shares and perpetual notes)		(8)	-	(8)	-	-	(8)
Profit for the year attributable to equity holders of Standard Life Aberdeen plc		64	338	402	297	-	699
Profit attributable to non-controlling interests
Ordinary shares				-	25		25
Preference shares and perpetual notes				8	-		8
Profit for the year				410	322		732

¹    Share of associates' and joint ventures' profit before tax comprises the Group's share of results HDFC Life, HDFC AMC and Heng An Standard Life Insurance Company Limited.

²    Amortisation and impairment of intangible assets acquired in business combinations includes £125m included in Other administrative expenses and set out in Note 14, and £13m relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the consolidated income statement.

 

 (b)(ii)  Total income and expenses

The following table provides a reconciliation of total adjusted operating income and total adjusted operating expenses, as presented in the analysis of Group adjusted profit by segment, to total revenue and total expenses respectively, as presented in the IFRS consolidated income statement:

	2018		2017
	Income	Expenses	Income	Expenses
	£m	£m	£m	£m
Total adjusted operating income and adjusted operating expenses as presented in the analysis of Group adjusted profit by segment from continuing operations	1,868	(1,395)	1,447	(1,084)
Insurance and participating investment contract claims and change in liabilities	1	(1)	201	(201)
Change in non-participating investment contract liabilities	(78)	78	74	(74)
Change in liability for third party interest in consolidated funds	(5)	5	6	(6)
Other presentation differences	152	(152)	79	(79)
Adjusting items included in revenue and expenses	202	(1,355)	345	(328)
Capital management	(9)	-	13	-
Total income and expenses as presented in the IFRS consolidated income statement from continuing operations	2,131	(2,820)	2,165	(1,772)

This reconciliation includes a number of reconciling items which arise due to presentation differences between IFRS reporting requirements and the determination of adjusted operating income and adjusted operating expenses. Adjusted operating income and expenses exclude items which have an equal and opposite effect on IFRS revenue and IFRS expenses in the consolidated income statement, such as investment returns which are for the account of policyholders. Other presentation differences generally relate to items included in administrative expenses which are borne by policyholders, for example investment property management expenses, or are directly related to fee income. Other presentation differences also include Aberdeen Standard Investments commission expenses which are presented in expenses in the consolidated income statement but are netted against adjusted operating income in the analysis of Group adjusted profit by segment.

(c)     Total income from continuing operations by geographical location

Total income from continuing operations as presented in the consolidated income statement split by geographical location is as follows:

	2018	2017
	£m	£m
UK	1,291	1,140
Europe, Middle East and Africa	201	214
Asia Pacific	464	693
Americas	175	118
Total	2,131	2,165

The income of the operating businesses is allocated based on where the income is earned. The return on investment funds is allocated based on where funds are registered.

(d)     Non-current non-financial assets by geographical location

	2018	2017
	£m	£m
UK	3,417	13,632
Europe, Middle East and Africa	2	771
Asia Pacific	6	3
Americas	40	3
Total	3,465	14,409

Non-current non-financial assets for this purpose consist of investment property, property, plant and equipment and intangible assets (excluding deferred acquisition costs).

3.     Investment return

Gains and losses resulting from changes in both market value and foreign exchange on investments classified at fair value through profit or loss are recognised in the consolidated income statement in the period in which they occur. The gains and losses include investment income received such as interest payments but exclude dividend income. Dividend income is separately recognised in the consolidated income statement when the right to receive payment is established.

Interest income on financial instruments classified as available-for-sale or loans and receivables is separately recognised in the consolidated income statement using the effective interest rate method. The effective interest rate method allocates interest and other finance costs at a constant rate over the expected life of the financial instrument, or where appropriate a shorter period, by using as the interest rate the rate that exactly discounts the future cash receipts over the expected life to the net carrying value of the instrument.

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

 

 

		2018	2017 restated1
		£m	£m
Interest and similar income
Cash and cash equivalents		18	4
Available-for-sale debt securities		11	10
		29	14
Dividend income		49	16
Gains/(losses) on financial instruments at fair value through profit or loss
Equity securities and interests in pooled investment funds (other than dividend income)		(193)	225
Debt securities		2	-
Derivative financial instruments		(8)	(9)
		(199)	216
Foreign exchange gains/(losses) on financial instruments other than those at fair value through profit or loss		5	(8)
Investment return from continuing operations		(116)	238

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

4.     Revenue from contracts with customers

Revenue from contracts with customers is recognised as services are provided and it is almost certain that the revenue will be received. Where revenue is received in advance (front-end fees), this income is deferred and recognised as a deferred income liability until the services have been provided (see Note 36).

Revenue from contracts with customers excludes premium written and earned on insurance and participating investment contracts (Refer Note 31).

(a)     Revenue from contracts with customers

The following table provides a breakdown of total revenue from contracts with customers:

	2018	2017
	£m	£m
Asset management
Management fee income - Strategic insurance partners	370	274
Management fee income - Other clients	1,372	1,023
Performance fees	9	20
Revenue from contracts with customers for asset management	1,751	1,317
Fund platforms
Fee income	173	137
Other revenue from contracts with customers	31	32
Total revenue from contracts with customers from continuing operations	1,955	1,486

 

Asset management

Through a number of its subsidiaries, the Group provides asset management to its customers. This performance obligation is performed over time with the revenue recognised as the obligation is performed. The Group generally receives asset management fees based on the percentage of the assets under management. The percentage varies depending on the level and nature of assets under management. Asset management fees are either deducted from assets or invoiced. Deducted fees are generally calculated, recognised and collected on a daily basis. Other asset management fees are invoiced to the customer either monthly or quarterly with receivables recognised for unpaid invoices. The payment terms for invoiced revenue vary but are typically 30 days from receipt of invoice. Accrued income is recognised to account for income earned but not yet invoiced. There is also limited use of performance fees. Performance fees are only recognised once it is highly probable that the revenue will be received.

Fund platforms

Through a number of its subsidiaries, the Group offers customers access to fund platforms. The platforms give customers the ongoing functionality to manage and administer their investments. This performance obligation is performed over time with the revenue recognised as the obligation is performed. Customers pay a platform charge which is generally calculated as a percentage of their assets. The percentage varies depending on the level of assets on the specific platform. The main platform charges are calculated either daily or monthly and are collected and recognised monthly. The charges are collected directly from assets on the platform. There are no significant payment terms.

The revenue from the contracts with customers is reported within the Asset management and platforms segment. The following table provides a reconciliation of Revenue from contracts with customers as presented in the consolidated income statement to fee based revenue, as presented in the analysis of adjusted profit before tax for the Asset management and platforms segment.

	2018	2017
	£m	£m
Revenue from contracts with customers from continuing operations as presented in the consolidated income statement	1,955	1,486
Presentation differences
Commission expenses	(105)	(45)
Other differences	18	6
Fee based revenue from continuing operations as presented in the Asset management and platforms segment	1,868	1,447

Commission expenses are netted against fee based revenue in the segment reporting but are included within expenses in the consolidated income statement. Other presentation differences relates to amounts presented in a different income line item of the consolidated income statement and intra-group revenue which is eliminated in the consolidated income statement but grossed up for the purposes of segmental reporting.

(b)     Contract receivables, assets and liabilities

The Group has recognised the following receivables, assets and liabilities in relation to contracts with customers.

		31 December 2018	31 December 2017	1 January 2017
	Notes	£m	£m	£m
Amount receivable from contracts with customers	22	112	104	68
Accrued income from contracts with customers	22	214	249	67
Cost of obtaining customer contracts	14	80	11	-
Deferred acquisitions costs	15	6	356	389
Total contract receivables and assets		412	720	524

 

		31 December 2018	31 December 2017	1 January 2017
	Notes	£m	£m	£m
Deferred Income	36	75	157	198
Accruals	37	5	6	-
Total contract liabilities		80	163	198

The deferred income at 31 December 2018 relates to future services to be provided to Phoenix relating to certain client propositions.

The movement in the Cost of obtaining customer contracts is primarily due to investment management contracts obtained via a number of asset purchases in the year.

5.     Other administrative expenses

		2018	2017 restated1
	Notes	£m	£m
Interest expense		5	-
Commission expenses		105	49
Staff costs and other employee-related costs		673	616
Operating lease rentals		50	31
Auditors' remuneration		8	5
Depreciation of property, plant and equipment	18	16	6
Amortisation of intangible assets	14	207	87
Impairment losses on intangible assets2	14	46	46
Impairment losses on disposal group classified as held for sale	24	2	24
Other		634	432
		1,746	1,296
Acquisition costs deferred during the year	15	(2)	(4)
Amortisation of deferred acquisition costs	15	2	3
Total other administrative expenses from continuing operations		1,746	1,295

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

²    Impairment losses on intangible assets excludes a goodwill impairment charge of £880m (2017: £nil) recognised separately as an individual item on the consolidated income statement. Refer note 14.

In addition to interest expense of £5m (2017: £nil), interest expense of £45m (2017: £34m) was incurred in respect of subordinated liabilities.

6.     Staff costs and other employee-related costs

The following table shows the staff costs and other employee-related costs aggregated for both continuing and discontinued operations.

		2018	2017
	Notes	£m	£m
The aggregate remuneration payable in respect of employees:
Wages and salaries		655	633
Social security costs		68	75
Pension costs
Defined benefit plans		(36)	(22)
Defined contribution plans		71	57
Employee share-based payments and deferred fund awards	45	14	38
Total staff costs and other employee-related costs		772	781

 

	2018	2017
The average number of staff employed by the Group during the year:
Asset management and platforms	6,360	5,112
UK and European insurance (classified as discontinued operations)1	1,959	2,656
Total average number of staff employed	8,319	7,768

¹    Includes all staff employed by the UK and European insurance business until 31 August 2018.

Information in respect of Directors' remuneration is provided in the Directors' remuneration report on pages 81 to 102.

7.     Auditors' remuneration

The following table shows the auditors' remuneration aggregated for both continuing and discontinued operations.

	2018	2017
	£m	£m
Fees payable to the Company's auditors for the audit of the Company's individual and consolidated financial statements	1.1	0.9
Fees payable to the Company's auditors for other services
The audit of the Company's consolidated subsidiaries pursuant to legislation	3.6	4.8
Audit related assurance services	1.7	1.9
Total audit and audit related assurance fees	6.4	7.6
Other assurance services	1.6	0.3
Other non-audit fee services	0.2	0.1
Total non-audit fees	1.8	0.4
Total auditors' remuneration	8.2	8.0

Auditors' remuneration disclosed above excludes audit and non-audit fees payable to the Group's principal auditor by Group managed funds which are not controlled by the Group, and therefore not consolidated in the Group's financial statements.

During the year ended 31 December 2018 no audit fees were payable in respect of defined benefit plans to the Group's principal auditor (2017: £nil).

For more information on non-audit services, refer to the Audit Committee report in Section 3 - Corporate governance statement.

8.     Restructuring and corporate transaction expenses

Total restructuring and corporate transaction expenses incurred from continuing operations during the year were £231m (2017: £162m). The 2018 expenses mainly relate to integration and merger related costs of £191m (2017: £109m) and a number of other business unit restructuring programmes. Deal costs relating to acquisitions included in restructuring and corporate transaction expenses for the year ended 31 December 2018 were £1m (2017: £38m). In 2017 £4m was also recognised directly in the merger reserve in equity in relation to the Aberdeen merger.

For the purposes of determining adjusted profit from continuing operations, an additional £8m was recognised in 2018 relating to our share of insurance associate restructuring and corporate transaction expenses (2017: £nil).

Restructuring and corporate transaction expenses of £264m (2017: £11m) are used to determine adjusted profit before tax from discontinued operations. In 2018 these expenses mainly relate to the sale of the UK and European insurance business discussed in Note 1. This includes separation costs of £53m (2017: £nil) and £198m (2017: £nil) in relation to the redemption of Tier 1 subordinated bonds. A further £80m of separation costs have been included in the gain on sale relating to contractual obligations arising from the transaction. In 2017, an additional £3m of restructuring and corporate transaction expenses were incurred by the Heritage With Profits Fund.

9.     Taxation

The Group's tax expense comprises both current tax and deferred tax expense.

Current tax is the expected tax payable on taxable profit for the year.

A deferred tax asset represents a tax deduction that is expected to arise in a future period. It is only recognised to the extent that there is expected to be future taxable profit or investment return to offset the tax deduction. A deferred tax liability represents taxes which will become payable in a future period as a result of a current or prior year transaction. Where local tax law allows, deferred tax assets and liabilities are netted off on the statement of financial position. The tax rates used to determine deferred tax are those enacted or substantively enacted at the reporting date.

Deferred tax is recognised on temporary differences arising from investments in subsidiaries and associates unless the timing of the reversal is in our control and it is expected that the temporary difference will not reverse in the foreseeable future.

Current tax and deferred tax is recognised in the consolidated income statement except when it relates to items recognised in other comprehensive income or directly in equity, in which case it is credited or charged to other comprehensive income or directly to equity respectively.

(a)     Tax charge in the consolidated income statement

(a)(i)  Current year tax expense

		2018	2017 restated1
		£m	£m
Current tax:
UK		20	12
Double tax relief		-	(2)
Overseas		44	19
Adjustment to tax expense in respect of prior years		3	(1)
Total current tax attributable to continuing operations		67	28
Deferred tax:
Deferred tax (credit)/expense arising from the current year		(12)	(12)
Adjustment to deferred tax in respect of prior years		(12)	12
Total deferred tax attributable to continuing operations		(24)	-
Total tax expense attributable to continuing operations		43	28

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

The share of associates' and joint ventures' tax expense is £40m (2017: £41m) and is included in profit before tax in the consolidated income statement in 'Share of profit from associates and joint ventures'.

In 2018 unrecognised tax losses from previous years were used to reduce the current tax expense by £4m (2017: £3m). Unrecognised tax losses and timing differences were used to reduce the deferred tax expense by £nil (2017: £3m).

Current tax recoverable and current tax liabilities at 31 December 2018 were £6m (2017: £192m) and £23m (2017: £166m) respectively. Current tax assets and liabilities at 31 December 2018 and 31 December 2017 are expected to be recoverable or payable in less than 12 months.

(a)(ii)   Reconciliation of tax expense

		2018	2017 restated1
		£m	£m
(Loss)/Profit before tax from continuing operations		(787)	438
Tax at 19% (2017: 19.25%)		(150)	84
Permanent differences		21	(55)
Tax effect of accounting for share of profit from associates and joint ventures		(25)	(8)
Impairment losses on intangible assets		171	1
Impairment of investment in associate		43	-
Different tax rates		(16)	(4)
Adjustment to current tax expense in respect of prior years		3	(1)
Recognition of previously unrecognised tax credit		(4)	(6)
Deferred tax not recognised		10	6
Adjustment to deferred tax expense in respect of prior years		(12)	12
Write down of deferred tax asset		4	(1)
Non-taxable (profit)/loss on sale of subsidiaries and associates		(2)	-
Total tax expense from continuing operations for the year		43	28

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

The standard UK corporation tax rate for the accounting period is 19%. The UK corporation tax rate will reduce to 17% from 1 April 2020. This change has been taken into account in the calculation of the UK deferred tax balance at 31 December 2018.

The accounting for certain items in the consolidated income statement results in certain reconciling items in the table above, the values of which vary from year to year depending upon the underlying accounting values:

Details of significant reconciling items are as follows:

·  Permanent differences in 2018 include expenses and accounting losses which are not tax deductible for tax purposes. It also includes the difference between the tax basis and accounting value for employee share-based awards and non-deductible contributions to the Irish pension scheme. In 2017, there were a number of non-recurring items including non-taxable gains arising from the IPO of HDFC Life, a tax deductible donation made to Standard Life Foundation offset by expenses relating to the acquisition of Aberdeen which were not tax deductible.

·  The share of profit from associates and joint ventures is presented net of tax in the consolidated income statement and therefore gives rise to a reconciling item

·  The impairment of the goodwill intangible asset is not tax deductible

·  Impairment of investment in associates is not tax deductible

·  Different tax rates will vary according to the level of profit subject to tax at rates different from the UK corporation tax rate (such as in our Asian business) and in 2018 mainly comprises a non-recurring reconciling item from the gain on sale made on the IPO of HDFC AMC. This arose as the Indian rate of tax on capital gains is less than the UK corporate tax rate.

·  The ability to value tax losses and other tax assets also affects the tax charge. There is a non-recurring tax credit of £12m attributable to the deferred tax liability relating to intangible assets recognised from the Aberdeen merger in 2017. We have also not recognised a deferred tax asset of £10m on tax losses arising in the year due to uncertainty as to when these losses will be utilised.

The Group operates in a large number of territories and during the normal course of business will be subject to audit or enquiry by local tax authorities. At any point in time the Group will also be engaged in commercial transactions the tax outcome of which may be uncertain due to their complexity or uncertain application of tax law. Tax provisions, therefore, are subject to a level of estimation and judgement and may result in the Group recognising provisions for uncertain tax positions. Management will provide for uncertain tax positions where they judge that it is probable there will be a future outflow of economic benefits from the Group to settle the obligation. In assessing uncertain tax positions management considers each issue on its own merits using their judgement as to the estimate of the most likely outcome. Where the final outcome differs from the amount provided this difference will impact the tax charge in future periods. Management re-assesses provisions at each reporting date based upon latest available information.

(b)     Tax relating to components of other comprehensive income

Tax relating to components of other comprehensive income is as follows:

		2018	2017 restated1
		£m	£m
Tax relating to defined benefit pension plan deficits		-	10
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss		-	10
Deferred tax on net change in financial assets designated as available-for-sale		(1)	-
Tax relating to fair value losses recognised on cash flow hedges		9	(5)
Tax relating to cash flow hedge losses transferred to consolidated income statement		(7)	2
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss		1	(3)
Tax relating to other comprehensive income from continuing operations		1	7

¹    Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.

All of the amounts presented above are in respect of equity holders of Standard Life Aberdeen plc.

(c)     Tax relating to items taken directly to equity

		2018	2017
	Notes	£m	£m
Tax credit on reserves for employee share-based payments	29	-	(1)
Tax credit relating to coupons payable on perpetual notes classified as equity		(6)	(2)
Tax relating to items taken directly to equity		(6)	(3)

 (d)    Deferred tax assets and liabilities

(d)(i)  Movements in net deferred tax liabilities

		2018	2017
		£m	£m
At 1 January		(302)	(217)
Reclassified as held for sale during the year		224	-
Acquired through business combinations		(1)	(89)
Amounts credited/(charged) to the consolidated income statement		44	11
Amounts credited directly to equity in respect of employee share-based payments		(2)	1
Tax on defined benefit pension plan deficits		-	(10)
Tax on available-for-sale assets		1	-
Tax on cash flow hedge		(2)	3
Foreign exchange adjustment		-	(1)
Other		(1)	-
Net deferred tax liability at 31 December		(39)	(302)

(d)(ii)   Analysis of recognised deferred tax

		2018	2017
		£m	£m
Deferred tax assets comprise:
Actuarial liabilities		-	5
Losses carried forward		27	11
Depreciable assets		9	12
Deferred income		-	8
Employee benefits		24	37
Provisions and other temporary timing differences		2	2
Insurance related items		-	5
Other		-	4
Gross deferred tax assets		62	84
Less: Offset against deferred tax liabilities		(1)	(19)
Deferred tax assets		61	65
Deferred tax liabilities comprise:
Insurance related items		-	4
Unrealised gains on investments		3	196
Deferred acquisition costs		-	53
Employee benefits		2	-
Temporary timing differences		1	-
Deferred tax on intangible assets acquired through business combinations		92	130
Other		3	3
Gross deferred tax liabilities		101	386
Less: Offset against deferred tax assets		(1)	(19)
Deferred tax liabilities		100	367
Net deferred tax liability at 31 December		(39)	(302)

A deferred tax asset of £27m (2017: £11m) for the Group has been recognised in respect of losses of various subsidiaries. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against the reversal of deferred tax liabilities and anticipated taxable profits and gains based on business plans.

Deferred tax assets and liabilities are expected to be recovered or settled after more than 12 months.

(e)     Unrecognised deferred tax

Due to uncertainty regarding recoverability, deferred tax assets have not been recognised in respect of the following:

·  Cumulative losses carried forward of £74m in the UK and £268m overseas (2017: £90m, £293m respectively)

·  Tax reserves of the German branch of SLAL of £nil (2017: £102m)

·  Loss relating to Irish pension scheme deficit £nil (2017: £42m)

Of these unrecognised deferred tax assets, certain losses have expiry dates as follows:

·  US losses of £169m with expiry dates between 2027-2037

·  Other overseas losses of £11m with expiry dates before 2023

·  Other overseas losses of £3m with expiry dates between 2024 and 2028

10.   Discontinued operations

The Group classifies as discontinued operations areas of business which have been disposed of or are classified as held for sale at the year end and which either, represent a separate major line of business or geographical area, or are part of a plan to dispose of one. The results of discontinued operations are shown separately on the face of the consolidated income statement from the results of the remaining (continuing) parts of the Group's business.

Discontinued operations relate solely to the UK and European insurance business. The sale completed on 31 August 2018 (refer Note 1). The consolidated income statement, other comprehensive income and cash flows from discontinued operations are shown below:

		2018	2017
Consolidated income statement	Notes	£m	£m
Income
Investment return		2,350	12,536
Revenue from contracts with customers		117	185
Insurance and participating investment contract premium income		1,256	2,054
Profit on disposal of subsidiaries		1,780	-
Other income		10	18
Total income from discontinued operations		5,513	14,793
Expenses
Insurance and participating investment contract claims and change in liabilities		1,657	3,427
Change in non-participating investment contract liabilities		1,470	8,889
Administrative expenses
Restructuring and corporate transaction expenses	8	264	14
Other administrative expenses		339	665
Total administrative expenses		603	679
Provision for annuity sales practices		-	100
Change in liability for third party interest in consolidated funds		(32)	1,118
Finance costs		35	54
Total expenses from discontinued operations		3,733	14,267
Profit before tax from discontinued operations		1,780	526
Tax expense attributable to policyholders' returns		46	166
Profit before tax expense attributable to equity holders		1,734	360
Total tax expense		82	204
Less: Tax attributable to policyholders' returns		(46)	(166)
Tax expense attributable to equity holders		36	38
Profit for the period from discontinued operations		1,698	322

Intercompany income and expenses that will continue post completion are eliminated in discontinued operations, those that will not continue post completion are eliminated in continuing operations. Revenue from contracts with customers is shown net of elimination of intra-group revenue which will continue post completion.

The Group provides additional disclosure in relation to the total tax expense for discontinued operations. Certain products are subject to tax on policyholders' investment returns. This tax, 'policyholder tax', is accounted for as an element of income tax. To make the tax expense disclosure more meaningful, we disclose policyholder tax and tax payable on equity holders' profits separately. The policyholder tax expense is the amount payable in the period plus the movement of amounts expected to be payable in future periods by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders' profit.

 

		2018	2017
Other comprehensive income		£m	£m
Items that will not be reclassified subsequently to profit or loss:
Revaluation of owner occupied property		2	1
Total items that will not be reclassified subsequently to profit or loss		2	1
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations		3	(1)
Change in unallocated divisible surplus		(5)	12
Total items that may be reclassified subsequently to profit or loss		(2)	11
Items that were transferred to profit or loss on disposal of subsidiaries:
Release of foreign currency translation reserve		(43)	-
Total items that were transferred to profit or loss on disposal of subsidiaries		(43)	-
Other comprehensive income for the period from discontinued operations		(43)	12

 

	2018	2017
Cash flows	£m	£m
Net cash flows from operating activities	155	2,247
Net cash flows from financing activities	(710)	(1,309)
Net cash flows from investing activities	(7,537)	(38)
Total net cash flows	(8,092)	900

 

The net cash flows from investing activities for the year ended 31 December 2018 do not include cash consideration received from the disposal of the UK and European insurance business of £1,971m but includes the cash and cash equivalents of £7,472m at the date of disposal.

11.   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 excluding shares owned by the employee trusts that have not vested unconditionally to 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.

Adjusted earnings per share is calculated on adjusted profit after tax attributable to ordinary equity holders of the Company i.e. adjusted profit net of dividends paid on preference shares.

Basic earnings per share was 29.1p (2017: 29.8p) and diluted earnings per share was 29.1p (2017: 29.6p) for the year ended 31 December 2018. The following table shows details of basic, diluted and adjusted earnings per share.

	2018			2017
	Continuing operations	Discontinued operations	Total	Continuing operations	Discontinued operations	Total
	£m	£m	£m	£m	£m	£m
Adjusted profit before tax	650	210	860	475	379	854
Tax on adjusted profit	(95)	(77)	(172)	(77)	(31)	(108)
Share of associates' and joint ventures' tax expense	(43)	-	(43)	(41)	-	(41)
Adjusted profit after tax	512	133	645	357	348	705
Dividend paid on preference shares	(5)	-	(5)	-	-	-
Adjusted profit after tax attributable to equity holders of the Company	507	133	640	357	348	705
Adjusting items	(1,397)	1,519	122	4	(44)	(40)
Tax on adjusting items	52	41	93	49	(7)	42
Share of associates' and joint ventures' tax expense on adjusting items	3	-	3	-	-	-
Adjustment for perpetual debt instruments classified as equity net of tax	-	(28)	(28)	(8)	-	(8)
Profit attributable to equity holders of the Company	(835)	1,665	830	402	297	699
	Millions			Millions
Weighted average number of ordinary shares outstanding			2,848			2,343
Dilutive effect of share options and awards			29			17
Weighted average number of diluted ordinary shares outstanding			2,877			2,360
	Pence	Pence	Pence	Pence	Pence	Pence
Basic earnings per share	(29.3)	58.4	29.1	17.1	12.7	29.8
Diluted earnings per share	(29.3)	58.4	29.1	17.0	12.6	29.6
Adjusted earnings per share	17.8	4.7	22.5	15.2	14.9	30.1
Adjusted diluted earnings per share	17.8	4.7	22.5	15.1	14.8	29.9

Details of share options and awards which may be treated as dilutive are provided in Note 45. In accordance with IAS 33, no share options and awards were treated as dilutive for the year ended 31 December 2018 due to the loss attributable to equity holders of the Company from continuing operations in the year. This results in the adjusted diluted earnings per share from continuing operations and the total diluted earnings per share including discontinued operations being calculated using a weighted average number of ordinary shares of 2,848 million.

As discussed in Note 26 the Company undertook a share consolidation during the year followed by a return of capital to shareholders. In accordance with IAS 33, earnings per share have not been restated following the share consolidation as there was an overall corresponding change in resources due to the redemption of the B shares. As a result of the share consolidation and share buyback, earnings per share from continuing operations for the year ended 31 December 2018 is not directly comparable with the prior year.

12.   Adjusted profit and adjusting items

Adjusted profit before tax is the Group's key alternative performance measure. Adjusted profit excludes the impact of the following items:

·  Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.

·  Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts

·  Profit or loss arising on the disposal of a subsidiary, joint venture or associate

·  Fair value movements in contingent consideration

·  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group

Adjusted profit also excludes impacts arising from investment return variances (formerly called short-term fluctuations in investment return) and economic assumption changes in the Group's insurance entities. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from adjusted profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from adjusted profit and is presented within profit before tax.

Coupons payable on perpetual notes classified as non-controlling interests for which interest is accrued are included in adjusted profit before tax. For IFRS purposes, these are recognised directly in equity. This gave rise to an adjusting item in 2017, prior to the reclassification of such instruments to subordinated liabilities on 18 December 2017. Dividends payable on preference shares classified as non-controlling interests are excluded from adjusted profit in line with the treatment of ordinary shares. Similarly to preference shares, our share of interest payable on Tier 1 debt instruments held by associates, for which interest is only accounted for when paid, is excluded from adjusted profit.

(a)     Investment return variances and economic assumptions changes - insurance entities

Wholly owned insurance entities

The Group's UK and European insurance business was sold during the year and is classified as discontinued operations. The Group's other wholly owned insurance business, SL Asia, is classified as held for sale (see Note 24).

The components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movement in equity holder liabilities, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from adjusted profit for the Group's wholly owned insurance entities. Investments backing equity holder funds include investments backing annuities and subordinated debt, and investments from surplus capital in insurance companies.

For annuities this means that all fluctuations in liabilities and the assets backing those liabilities due to market interest rate (including credit risk) movements over the year are excluded from adjusted profit.

The expected rates of return for debt securities and equity securities are determined separately. The expected rates of return for equity securities are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium of 3% (2017: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also use an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium of 3% (2017: 3%).

In respect of debt securities at fair value through profit or loss, the expected rate of return is determined based on the average prospective yields for the debt securities actually held.

The expected rates of return used for both the assets backing subordinated liabilities and the subordinated liabilities themselves include a discount for expected credit defaults. This means that the interest expense included in adjusted profit for subordinated liabilities is after deducting a margin for own credit risk. Additionally, the effect of the accounting mismatch, where subordinated liabilities are measured at amortised cost and certain assets backing the liabilities are measured at fair value, is also excluded from adjusted profit.

There have been no actual defaults or impairments of assets backing subordinated liabilities during the year ended 31 December 2018 or
31 December 2017. If these were to arise they would be excluded from adjusted profit.

Gains and losses on foreign exchange are deemed to represent investment return variances and economic assumption changes and thus are excluded from adjusted profit.

Investment return variances and economic assumption changes for the year ended 31 December 2018 and 31 December 2017 relate principally to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities.

Associates and joint ventures insurance entities

Where associates and joint ventures have a policy for determining investment return variances and economic assumption changes, the Group uses the policy of the associate or joint venture for including their results in the Group's adjusted profit. This currently applies only to the Group's investment in Phoenix. The Phoenix policy is similar to that used by the wholly owned insurance entities as described above. The main differences are as follows:

·  Phoenix investment return variances, including those relating to owners' funds, include gains and losses on derivatives held to hedge life company Solvency II surplus positions. Such hedging positions were not previously held outside with profit funds by wholly owned insurance entities.

·  Phoenix recognise charges on unit linked business based on expected investment returns, whereas wholly owned insurance entities use actual investment returns.

·  Phoenix include the impact of strategic asset allocation activities, such as investment in higher yielding illiquid assets, as investment variances. Wholly owned subsidiaries treat these within adjusted profit where they are directly related to a significant management action.

(b)     Other

In the reconciliation of consolidated adjusted profit before tax to profit for the period the Other adjusting item sub-total includes (£2m) (2017: (£24m)) in relation to the impairment of a disposal group classified as held for sale and £3m (2017: (£1m)) net fair value movements in contingent consideration.

The Other adjusting item in 2018 relating to discontinued operations includes a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of £44m. Following the classification of the UK and European insurance business as held for sale on the announcement of the proposed transaction on 23 February 2018, no amortisation or depreciation was recognised. This increase to profit has been recognised as an adjusting item.

13.   Dividends on ordinary shares

Dividends are distributions of profit to holders of Standard Life Aberdeen plc's share capital and as a result are recognised as a deduction in equity. Final dividends are announced with the Annual report and accounts and are recognised when they have been approved by shareholders. Interim dividends are announced with the Half year results and are recognised when they are paid.

 

	2018		2017
	Pence per share	£m1	Pence per share	£m
Prior year's final dividend paid	14.30	420	13.35	263
Interim dividend paid	7.30	214	7.00	206
Total dividends paid on ordinary shares		634		469
Current year final recommended dividend	14.30	345	14.30	421

¹    Estimated for current year final recommended dividend.

The final recommended dividend will be paid on 21 May 2019 to shareholders on the Company's register as at 12 April 2019, subject to approval at the 2019 Annual General Meeting. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2018 is 21.60p (2017: 21.30p).

In addition to the dividend distribution on ordinary shares, the Group returned 33.99 pence per ordinary share (£1,000m) to shareholders through a B share scheme as discussed in Note 26.

14.   Intangible assets

Goodwill is created when the Group acquires a business and the consideration exceeds the fair value of the net assets acquired. In determining the net assets acquired in business combinations, intangible assets are recognised where they are separable or arise from contractual or legal rights. Intangible assets acquired by the Group through business combinations consist mainly of customer relationships, technology and brands. Any remaining value that cannot be identified as a separate intangible asset on acquisition forms part of goodwill.

In addition to intangibles acquired through business combinations, the Group recognises as intangible assets software which has been developed internally and other purchased technology which is used in managing and executing our business. Costs to develop software internally are capitalised after the research phase and when it has been established that the project is technically feasible and the Group has both the intention and ability to use the completed asset.

Intangible assets are recognised at cost and amortisation is charged to the income statement over the length of time the Group expects to derive benefits from the asset. The allocation of the income statement charge to each reporting period is dependent on the expected pattern over which future benefits are expected to be derived. Where this pattern cannot be determined reliably the charge is allocated on a straight-line basis.

Goodwill is not charged to the income statement unless it becomes impaired.

The Group also recognises the cost of obtaining customer contracts (see Note 4) as an intangible asset. For the cost of obtaining customer contracts, the intangible asset is amortised on the same basis as the transfer to the customer of the services to which the intangible asset relates.

 

 

		Acquired through business combinations
		Goodwill	Brand	Customer relationships and investment management contracts	Technology	Internally developed software1	Purchased software and other	Cost of obtaining customer contracts	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m
Gross amount
At 1 January 2017		233	-	254	30	345	66	-	928
Additions		3,209	93	728	44	58	-	11	4,143
Disposals and adjustments		-	-	-	-	(1)	-	-	(1)
Other		-	-	-	-	1	-	-	1
At 31 December 2017		3,442	93	982	74	403	66	11	5,071
Reclassified as held for sale during the year		(18)	-	-	(6)	(311)	(67)	-	(402)
Additions		14	-	37	-	29	4	79	163
Disposals and adjustments		-	-	-	(1)	-	1	-	-
Other		-	-	-	-	-	-	6	6
At 31 December 2018		3,438	93	1,019	67	121	4	96	4,838
Accumulated amortisation and impairment
At 1 January 2017		(10)	-	(100)	(29)	(178)	(39)	-	(356)
Amortisation charge for the year		-	(7)	(68)	(5)	(37)	(7)	-	(124)
Impairment losses recognised		(5)	-	(40)	-	(32)	-	-	(77)
Disposals and adjustments		-	-	-	-	1	-	-	1
Other		-	-	-	-	(1)	-	-	(1)
At 31 December 2017		(15)	(7)	(208)	(34)	(247)	(46)	-	(557)
Reclassified as held for sale during the year		-	-	-	6	204	46	-	256
Amortisation charge for the year	5	-	(19)	(143)	(13)	(16)	-	(16)	(207)
Impairment losses recognised2	5	(891)	-	(35)	-	-	-	-	(926)
Disposals and adjustments		-	-	-	-	-	-	-	-
Other		-	-	-	-	-	-	-	-
At 31 December 2018		(906)	(26)	(386)	(41)	(59)	-	(16)	(1,434)
Carrying amount
At 1 January 2017		223	-	154	1	167	27	-	572
At 31 December 2017		3,427	86	774	40	156	20	11	4,514
At 31 December 2018		2,532	67	633	26	62	4	80	3,404

¹    Included in the internally developed software of £62m (2017: £156m) is £13m (2017: £53m) relating to intangible assets not yet ready for use.

²    Included in goodwill impairment losses recognised of £891m (2017: £5m) is an impairment of £880m (2017: £nil) recognised on the goodwill primarily arising from the acquisition of Aberdeen and £11m (2017: £5m) included in other administrative expenses in Note 5.

The Group's goodwill has been acquired through a series of business combinations, most recently through the acquisitions discussed in Note 1. Of the Group's goodwill of £2,532m (2017: £3,427m) at 31 December 2018, £2,483m (2017: £3,354m) is attributed to the Aberdeen Standard Investments group of cash-generating units, which comprises the Group's asset management business excluding HDFC AMC, in the Asset management and platforms segment. The remaining goodwill of £49m (2017: £73m) is attributable to a number of smaller cash-generating units in the Asset management and platforms segment.

Acquisition of Aberdeen in 2017

The additions to goodwill and intangible assets acquired through business combinations during the year to 31 December 2017 related solely to the acquisition of Aberdeen. Refer Note 1. On the acquisition of Aberdeen, we identified intangible assets in relation to customer relationships, brand and technology as being separable from goodwill. Identification and valuation of intangible assets acquired in business combinations is a key judgement.

Goodwill

Goodwill of £3,209m was attributed to the Aberdeen Standard Investments group of cash-generating units in relation to the acquisition of Aberdeen. In attributing the goodwill relating to the acquisition of Aberdeen to a group of cash-generating units we considered the existing cash-generating units which are expected to benefit from the synergies from the combination. As the benefit is expected to arise across Aberdeen Standard Investments (a combination of Aberdeen and Standard Life Investments now managed and reported together within the Asset management and platforms segment) we judged it was appropriate to allocate goodwill to this group of cash-generating units. This is the lowest level at which goodwill is monitored for internal management purposes.

The goodwill arising on acquisition of Aberdeen was mainly attributable to expected cash flows from new customers and significant synergies which are expected to be realised. Synergies expected to be available to all market participants which impact the cash flows relating to existing Aberdeen customer relationships were included in the valuation of the customer relationships discussed below, with additional synergies forming part of goodwill.

Customer relationships

The customer relationships acquired through Aberdeen were grouped where the customer groups have similar economic characteristics and similar useful economic lives. This gave rise to three separate intangible assets which we have termed Lloyds Banking Group, open ended funds, and segregated and similar.

In relation to the open ended funds we considered that it was most appropriate to recognise an intangible asset relating to customer relationships between Aberdeen and open ended fund customers, rather than an intangible asset relating to investment management agreements between Aberdeen and Aberdeen's open ended funds. Our judgement was that the value associated with the open ended fund assets under management was predominantly derived from the underlying customer relationships, taking into account that a significant proportion of these assets under management are from institutional clients.

The description of the three separate intangible assets including their estimated useful life at the acquisition date was as follows:

Customer relationship intangible asset	Description	Useful life at acquisition date	Fair value on acquisition date	Carrying value
			£m	£m
Lloyds Banking Group	Customer relationship with Lloyds Banking Group, including Scottish Widows Group.	4 years	78	4
Open ended funds	Separate vehicle group - open ended investment vehicles.	11 years	223	138
Segregated and similar	All other vehicle groups dominated by segregated mandates which represent 75% of this group.	12 years	427	338

Measuring the fair value of intangible assets acquired in business combinations required further assumptions and judgements. Customer relationships were valued using discounted cash flow projections. The key assumptions in measuring the fair value of the customer relationships at the acquisition date were as follows:

·  Net attrition - net attrition represents the expected rate of outflows of assets under management net of inflows from existing customers. This assumption is primarily based on recent experience.

·  Market growth - a market growth adjustment has been applied based on the asset class

·  Operating margin - this assumption is consistent with forecast margins and includes the impact of synergies that would be expected by any market participant and impact the Aberdeen customer relationship cash flows

·  Discount rate - this assumption is based on the internal rate of return (IRR) of the transaction and is consistent with a market participant discount rate

The above assumptions, and in particular the net attrition assumption, were also used to determine the useful economic life at the acquisition date of each asset used for amortisation. The reducing balance method of amortisation is considered appropriate for these intangibles, consistent with the attrition pattern on customer relationships which means that the economic benefits delivered from the existing customer base will reduce disproportionately over time.

Estimates and assumptions

The key estimates and assumptions in relation to intangible assets are:

·  Determination of the recoverable amount of goodwill and customer intangibles

·  Determination of useful lives

Determination of the recoverable amount of goodwill and customer intangibles

Goodwill is assessed for impairment at least annually by comparing the recoverable amount of each cash-generating-unit to which goodwill has been allocated with its carrying value. For all intangible assets, an assessment is made at each reporting date as to whether there is an indication that the goodwill or intangible asset has become impaired. If any indication of impairment exists and the carrying value exceeds the recoverable amount then the carrying value is written down to the recoverable amount.

The recoverable amounts are defined as the higher of fair value less costs to sell and the value in use where the value in use is based on the present value of future cashflows.

In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both the expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.

Goodwill

The impairment of goodwill in 2018 includes £880m (2017: £nil) relating to an impairment of the Aberdeen Standard Investments group of cash-generating-units which is in the Asset management and platforms segment. The impairment resulted from the impact of markets and flows on future earnings expectations.

The recoverable amount of this group of cash-generating-units, which is based on value in use, at 31 December 2018 is £4,111m. This was calculated using a terminal growth rate of 2.2% based on global GDP and a pre-tax discount rate of 11.1% based on the group cost of equity adjusted for forecasting risk. Cash flow projections for three years to end 2021 were based on management approved forecasts adjusted to market conditions at 31 December 2018. The impairment has been included within administrative expenses in the consolidated income statement. The recoverable amount in the prior year was based on fair value less costs of disposal.

The following table shows the consequence of downside sensitivities of key assumptions on the carrying amount of the goodwill balance at 31 December 2018.

			Goodwill
			£m
Reduction in growth rate of 0.2%			(93)
Discount rate increased by 0.5%			(231)
Forecast cash flows reduced by 5%			(206)

 

Customer intangibles

The recoverable amount for customer intangible assets is value in use. In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both the expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.

The 2018 impairment of £35m relates to the open-ended funds customer relationship intangible asset which is in the Asset management and platforms segment and which was recognised on the acquisition of Aberdeen. The impairment resulted from the impact of markets and flows on future earnings expectations. The recoverable amount of this asset which is its value in use is £138m and was calculated using a pre-tax discount rate of 13.1%. The remaining useful life as at 31 December 2018 is 9.7 years.

In relation to customer relationships acquired in business combinations, the most significant judgements relate to assumptions for the open-ended intangible assets acquired through the acquisition of Aberdeen. The following table shows the consequence of downside sensitivities of key assumptions to the carrying amounts at 31 December 2018:

 

			Open-ended
			£m
20% increase in net attrition			(16)
10% one-off decrease in AUM at 1 January 2019			(14)
Operating margin percentage decreased by 2.5%			(19)
Discount rate percentage increased by 2%			(8)

The carrying value of the life company customer relationships/contracts acquired through Ignis at 31 December 2018 is £42m (2017: £50m). The remaining amortisation period of the life contracts is 9.5 years. As at 31 December 2018, increasing the discount rate by 2%, decreasing the operating margin by 2.5% or decreasing the AUM by 10% would not result in an impairment loss and therefore would have no impact on carrying value.

In February 2018 Lloyds Banking Group (LBG) and Scottish Widows informed the Group that Scottish Widows and LBG's Wealth business intended to review their long term asset management arrangements including those services that are currently undertaken by certain legacy Aberdeen entities. The impairment of customer relationship and investment management contracts intangible assets in 2017 of £40m related to this announcement and was an impairment of the Lloyds Banking Group customer relationship intangible asset in the Asset management and platforms segment. The recoverable amount of this asset, which is its value in use, at 31 December 2017 was £26m and was calculated using a pre-tax discount rate of 13%. The remaining useful live was 1.1 years. The other key assumptions used to measure the value in use calculation as at 31 December 2017 were consistent with those used in the acquisition date valuation set out on page 148.

Determination of useful lives

The determination of useful lives requires judgement in respect of the length of time that the Group expects to derive benefits from the asset and considers for example expected duration of customer relationships and when technology is expected to become obsolete for technology based assets. The amortisation period and method for each of the Group's intangible asset categories is as follows:

·  Customer relationships acquired through business combinations - generally between 7 and 12 years, generally reducing balance method

·  Investment management contracts acquired through business combinations - between 10 and 17 years, straight-line

·  Brand acquired through business combinations - 5 years, straight-line

·  Technology acquired through business combinations - between 3 and 6 years, straight line

·  Internally developed software - between 2 and 6 years. Amortisation is on a straight-line basis and commences once the asset is available for use

·  Purchased software - between 2 and 6 years, straight-line

·  Costs of obtaining customer contracts - between 3 and 9 years, generally reducing balance method

Internally developed software

The determination of amounts to be recognised as internally developed software requires judgement and assumptions in respect of whether assets are capable of being separated and the extent to which development costs form part of the separable asset. Additionally judgement is required to determine which costs have been incurred in relation to the research phase, which are not capitalised, and which have been incurred in relation to the development phase of a project, which are capitalised. We consider that costs are directly attributable to the software asset and can therefore be capitalised, where they would not have been incurred if the software development had not taken place.

The impairment of internally generated software recognised during the year to 31 December 2017 included £31m relating to discontinuation of part of an IT transformation project in the UK and European insurance segment classified as discontinued.

 

15.   Deferred acquisition costs

The Group incurs costs to obtain and process new business. These are accounted for as follows:

Insurance and participating investment contracts

Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that was subject to the Prudential Regulation Authority (PRA) realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts 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.

Non-participating investment contracts

Incremental costs directly attributable to securing rights to receive fees from non-participating investment contracts are deferred. Where such costs are borne by a with profits fund that was subject to the PRA'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.

Trail or renewal commission on non-participating investment contracts 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.

 

		2018	2017
		£m	£m
At 1 January		612	651
Reclassified as held for sale during the year		(606)	(22)
Additions during the year		2	49
Amortisation charge		(2)	(79)
Foreign exchange adjustment		-	13
At 31 December		6	612

The amount of deferred acquisition costs expected to be recovered after more than 12 months is £6m (2017: £536m).

Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £6m (2017: £356m) which relates to contracts with customers (see Note 4(b)). The amortisation charge for deferred origination costs relating to contracts with customers from continuing operations for the year was £2m (2017: £2m).

16.   Investments in associates and joint ventures

Associates are entities where the Group can significantly influence decisions made relating to the financial and operating policies of the entity but does not control the entity. For entities where voting rights exist, significant influence is presumed where the Group holds between 20% and 50% of the voting rights.

Joint ventures are strategic investments where the Group has agreed to share control of an entity's financial and operating policies through a shareholders' agreement and decisions can only be taken with unanimous consent.

Associates, other than those accounted for at fair value through profit or loss, and joint ventures are accounted for using the equity method from the date that significant influence or shared control, respectively, commences until the date this ceases with consistent accounting policies applied throughout.

Under the equity method, direct investments in associates and joint ventures are initially recognised at cost. When an interest is acquired at fair value from a third party, the value of the Group's share of the investee's identifiable assets and liabilities is determined applying the same valuation criteria as for a business combination at the acquisition date. This is compared to the cost of the investment in the investee. Where cost is higher the difference is identified as goodwill and the investee is initially recognised at cost which includes this component of goodwill. Where cost is lower a bargain purchase has arisen and the investee is initially recognised at the Group's share of the investee's identifiable assets and liabilities unless the recoverable amount for the purpose of assessing impairment is lower, in which case the investee is initially recognised at the recoverable amount.

Subsequently the carrying value is adjusted for the Group's share of post-acquisition profit or loss and other comprehensive income of the associate or joint venture, which are recognised in the consolidated income statement and other comprehensive income respectively. The Group's share of post-acquisition profit or loss includes amortisation charges based on the valuation exercise at acquisition. The carrying value is also adjusted for any impairment losses.

Where the Group has an investment in an associate, a portion of which is held by, or is held indirectly through, a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at FVTPL.

During the year ended 31 December 2017 we changed our judgement in determining when the Group has significant influence over investment vehicles managed by the Group. In general, investment vehicles which are not subsidiaries are now considered to be associates where the Group holds more than 20% of the voting rights. Previously our judgement was that the Group had significant influence over all investment vehicles where, through its role as investment manager, it had power over the investment decisions of the vehicle. As a result previously the Group classified all Group managed investment vehicles which were not subsidiaries and in which the Group held an investment as associates. The reason for the change in accounting policy was to make the financial statements more relevant to users as it is more consistent with peers. This change in accounting policy only impacted the breakdown of 'Equities and investments in pooled investment vehicles', between amounts relating to investments in associates at FVTPL and other interests in pooled investment vehicles. This breakdown is disclosed in Note 40.

A full list of the Group's associates and joint ventures is included in Note 49.

 

The level of future dividend payments and other transfers of funds to the Group from associates and joint ventures accounted for using the equity method could be restricted by the regulatory solvency and capital requirements of the associate or joint venture, and certain local foreign currency transaction restrictions.

(a)     Investments in associates and joint ventures accounted for using the equity method

	2018			2017
	Associates	Joint ventures	Total	Associates	Joint ventures	Total
	£m	£m	£m	£m	£m	£m
At 1 January	404	99	503	484	88	572
Reclassified from/(to) held for sale	8	-	8	(33)	-	(33)
Exchange translation adjustments	(15)	3	(12)	(19)	(3)	(22)
Additions	1,023	72	1,095	-	-	-
Disposals	-	-	-	(58)	-	(58)
Profit after tax	121	9	130	35	10	45
Other comprehensive income	(16)	1	(15)	-	4	4
Dilution gains	7	-	7	17	-	17
Impairment	(228)	-	(228)	-	-	-
Distributions of profit	(44)	-	(44)	(22)	-	(22)
At 31 December	1,260	184	1,444	404	99	503

 

The following associates are considered to be material to the Group as at 31 December 2018.

Name of associate	Nature of relationship	Principal place of business	Measurement Method	Interest held by the Group	Fair value of interest held by the Group at 31 December 2018
Phoenix Group Holdings plc (Phoenix)	Associate	United Kingdom	Equity Accounted	19.98%	812
HDFC Life Insurance Company Limited (HDFC Life)	Associate	India	Equity Accounted	29.23%	2,567
HDFC Asset Management Company Limited (HDFC AMC)	Associate	India	Equity Accounted	29.96%	1,077

These associates are all listed. The country of incorporation or registration is the same as their principal place of business. The interest held by the Group is the same as the proportion of voting rights held. None of the Group's joint ventures are considered to be material to the Group as at 31 December 2018.  

(b)     Investments in associates accounted for using the equity method

The tables below provide summarised financial information for those associates which are considered to be material to the Group. The summarised financial information reflects the amounts presented in the financial statements or management accounts of the relevant associates amended to reflect adjustments made when using the equity method, including fair value adjustments on acquisition and not the Group's share of those amounts.

	Phoenix		HDFC Life		HDFC AMC
	2018	2017	2018	2017	2018	2017
	£m	£m	£m	£m	£m	£m
Summarised financial information of associate:
Revenue1	1,409	-	3,072	2,236	207	193
Profit after tax2	366	-	118	80	83	73
Other comprehensive income	(76)	-	-	-	-	-
Total assets2,3	230,111	-	13,349	12,238	336	471
Total liabilities3	224,042	-	12,598	11,589	23	221
Net assets2	6,069	-	751	649	313	250
Attributable to NCI	788	-	-	-	-	-
Attributable to investee's shareholder	5,281	-	751	649	313	250
Interest held	19.98%	-	29.23%	29.35%	29.96%	38.24%
Share of net assets2	1,055	-	220	190	94	96
	Phoenix		HDFC Life		HDFC AMC		Other		Total
	2018	2017	2018	2017	2018	2017	2018	2017	2018	2017
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Associates accounted for using the equity method	812	-	329	304	110	90	9	10	1,260	404
Associates classified as held for sale	-	-	-	-	-	33	-	-	-	33
Total amount recognised in consolidated statement of financial position	812	-	329	304	110	123	9	10	1,260	437
Dividends received4	33	-	-	10	14	12	-	-	47	22

¹    2017 revenue for HDFC Life has been restated to exclude investment income.

²    2017 profit after tax, total assets, net assets and share of net assets for HDFC Life have been restated to include intangible assets identified at the acquisition date of additional investments in HDFC Life acquired at fair value rather than book value and the related amortisation.

³    As a liquidity presentation is used by insurance companies when presenting their statement of financial position, an analysis of total assets and total liabilities between current and non-current has not been provided for Phoenix and HDFC Life. The majority of HDFC AMC's assets and liabilities are current.

⁴    2018 dividend received from HDFC AMC includes £3m on interest that was classified as held for sale.

Phoenix

Phoenix is the largest life and pensions consolidator in Europe. Our investment in Phoenix supports our strategic partnership. 

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business to Phoenix (the Sale), implemented by selling the entire issued share capital of Standard Life Assurance Limited (SLAL). Refer Note 1 for further details. Following the completion of the Sale in August 2018, as part of the total consideration, the Group was issued with new Phoenix shares representing 19.98% of the issued share capital of Phoenix. Our judgement was that taking into account our representation on Phoenix's board and the significant transactions between the Group and Phoenix, Phoenix should be classified as an associate.

At acquisition the value of the Group's share of Phoenix's identifiable assets and liabilities was determined. This value was determined using the same valuation bases as required for a business combination under which most of the identifiable assets and liabilities of the enlarged Phoenix group (including SLAL) were measured at fair value. The most significant assets that were not measured at fair value were Phoenix's defined benefit pension schemes which were measured at their IAS 19 value.

A key judgement was the identification, valuation and determination of useful lives, of the Group's share of Phoenix's intangible assets at the date of acquisition. The main intangible assets identified were the acquired present value of in-force business (AVIF) for both SLAL and other Phoenix entities. AVIF comprises the difference between the fair value and IFRS carrying value of insurance contracts together with the fair value of future profits expected to arise on investment contracts. The valuation of the AVIF has been determined using the application of present value techniques to the best estimate cash flows expected to arise from policies that were in-force at the acquisition date, adjusted to reflect the price of bearing the uncertainty inherent in those cash flows. This approach incorporates a number of judgements and assumptions which have impacted on the resultant valuation, the most significant of which are mortality rates, expected policy lapses, the expenses associated with servicing the policies, future investment returns, the discount rate and the risk adjustment for uncertainty, determined using a cost of capital approach. The Group's share of profit after acquisition under the equity method reflects the amortisation of these intangible assets. This differs from the amortisation recognised in Phoenix's own IFRS financial statements due to the revaluation of the existing Phoenix intangible assets at August 2018 for equity method purposes. The amortisation method reflects the expected emergence of economic benefits which results in higher amortisation in earlier periods.

	Useful life at acquisition date Years	Fair value at acquisition date £m	Group's share at  acquisition date £m
Intangible asset:
SLAL AVIF	24	2,931	586
Existing Phoenix AVIF	15	1,503	300

The cost of the Group's investment in Phoenix was equal to the fair value of its 19.98% interest at the date of acquisition, being £1,023m. The Group's share of the value of the identifiable net assets of the enlarged Phoenix group exceeded the cost of the Group's investment in Phoenix resulting in a bargain purchase gain of £15m which was offset by an impairment loss as described below.

Estimates and assumptions

At 31 December 2018 the market value of the Group's interest in Phoenix was £812m which was significantly below the carrying value. We considered this to be an indicator of impairment and therefore an impairment review was performed. A key area of estimation was determining the recoverable amount of Phoenix on a value in use basis for the purpose of assessing impairment. Given that the fair value was significantly below the carrying value, we considered that under IAS 28 the market value of Phoenix represented the best estimate of the present value of future dividends and therefore this market value of £812m was used as the value in use. As the value in use was based on the market value, a discount rate was not determined. An impairment loss of £243m has been recognised of which £15m arose at acquisition and has been offset against the bargain purchase gain. This has resulted in a difference between the Group's share of net assets of Phoenix and the carrying value at 31 December 2018.

Phoenix has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 as a result of meeting the exemption criteria as at 31 December 2015. As at that date Phoenix's activities were considered to be predominantly connected with insurance as the percentage of the carrying amount of its liabilities in relation to insurance relative to the total carrying amounts of all its liabilities was greater than 90%.

The table below separately identifies financial assets with contractual cash flows that are solely payments of principal and interest (excluding those held for trading or managed on a fair value basis) and all other financial assets, measured at fair value through profit and loss.

	Fair value as at 31 December 2018
	£m
Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis1	423
Financial assets other than those above2	204,154
Total	204,577

¹    Financial assets that are SPPI are all short term deposits with highly rated external institutions.

²    The change in fair value, for four months ended 31 December 2018, of all other financial assets that are fair value through profit or loss, is a loss of £11,509m.

HDFC Life

HDFC Life is one of India's leading life insurance companies.

On 17 November 2017, HDFC Life listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of an IPO in which the Group reduced its interest to 29.3%. Refer Note 1 for further details.

The difference between the carrying value of this associate and the Group's current share of net assets is due primarily to goodwill of £104m arising from additional investments being made at fair value rather than book value. (2017: £107m.)

The year end date for HDFC Life is 31 March which is different from the Group's year end date of 31 December. For the purposes of the preparation of the Group's consolidated financial statements, financial information as at and for the 12 months ended 31 December is used for HDFC Life.

At 31 March 2016 HDFC Life had significant insurance liabilities and its liabilities arising from contracts within the scope of IFRS 4 and liabilities connected with insurance were 97% of its total liabilities. Therefore HDFC Life was eligible to defer the implementation of IFRS 9 for equity accounting purposes.

The fair value of HDFC Life's financial assets at 31 December 2018 that remain under IAS 39 for equity accounting purposes and the change in fair value during the year ended 31 December 2018 are as follows:

	Fair value as at 31 December 2018
	£m
Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis1	5,662
Financial assets other than those above2	7,596
Total	13,258

¹    Financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) are predominantly AAA debt instruments including central and state government securities. Their carrying value at 31 December 2018 is £5,642m. Securities with fair value and carrying value of £10m are rated below BBB.

²    The change in fair value in the year to 31 December 2018 for financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) is a gain of £385m. The change in fair value for all other financial assets is a gain of £116m.

HDFC AMC

HDFC AMC manages a range of mutual funds and provides portfolio management and advisory services.

On 6 August 2018, HDFC AMC listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of an IPO. Refer Note 1 for further details. As a result of the planned IPO, a portion of the equity share capital of the associate was classified as held for sale as at 31 December 2017. Refer Note 24 for further details.

The difference between the carrying value of this associate and the Group's share of net assets is due primarily to goodwill arising on the buyback of shares by HDFC AMC from employees.

The year end date for HDFC AMC is 31 March which is different from the Group's year end date of 31 December. For the purposes of the preparation of the Group's consolidated financial statements, financial information as at and for the 12 months ended 30 September is used for HDFC AMC.

(c)     Investments in joint ventures

The Group has a number of joint ventures, none of which are considered material to the Group. The largest joint venture is Heng An Standard Life Insurance Company Limited (HASL). The table below provides summarised financial information for HASL. The summarised financial information reflects the amounts presented in the management accounts amended to reflect adjustments made when using the equity method.

	2018	2017
	£m	£m
Summarised financial information of joint venture:
Revenue1	361	293
Profit after tax	17	20
Other comprehensive income	1	7
Total assets	1,714	1,358
Total liabilities	1,347	1,160
Net assets	367	198
Interest held	50%	50%
Current share of net assets	184	99
Carrying value of joint venture	184	99
Dividends received	-	-

¹    2017 revenue for HASL has been restated to exclude investment income.

On 25 September 2018, the Group made a US$95m (£72m) capital contribution to HASL. The Group's interest remains at 50%.

(d)     Investments in associates measured at FVTPL

The aggregate fair value of associates accounted for at FVTPL included in equity securities and interests in pooled investment funds at 31 December 2018 is £34m (2017: £5,936m) none of which are considered individually material to the Group. These associates have no significant contingent liabilities to which the Group is exposed and there are no restrictions that would prevent the transfer of funds to the Group (2017: none).

17.   Investment property

Property held for long-term rental yields or investment gain that is not occupied by the Group and property being constructed or developed for future use as investment property are classified as investment property. Investment property is initially recognised at cost and subsequently measured at fair value. Gains or losses arising from changes in fair value are recognised in the consolidated income statement.

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

 

		2018	2017
	Notes	£m	£m
At 1 January		9,749	9,929
Reclassified as held for sale during the year		(9,749)	(225)
Other reclassifications1		-	(319)
Additions - acquisitions		-	270
Additions - subsequent expenditure		-	143
Net fair value gains/(losses)		-	485
Disposals		-	(525)
Transferred to owner occupied property	18	-	(17)
Foreign exchange adjustment		-	11
Other		-	(3)
At 31 December		-	9,749
The fair value of investment property can be analysed as:
Freehold		-	7,297
Long leasehold		-	2,452
		-	9,749

¹    During 2017 income strips measured at £319m were reclassified as debt securities. Refer Note 41 for further details.

There was no rental income arising from investment property or direct operating expenses (included within other administrative expenses) arising in respect of such rented property in relation to continuing operations in either year. All such income and expenses relates to discontinued operations (see Note 10).

Valuations are provided by independent qualified professional valuers at 31 December or as at a date that is not more than three months before
31 December. Where valuations have been undertaken at dates prior to the end of the reporting period, adjustments are made where appropriate to reflect the impact of changes in market conditions between the date of these valuations and the end of the reporting period.

Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows:

		2018	2017
		£m	£m
Not later than one year		-	470
Later than one year and no later than five years		-	1,488
Later than five years		-	3,392
Total operating lease receivables		-	5,350

 

18.   Property, plant and equipment

Property, plant and equipment consists primarily of property owned and occupied by the Group and the computer equipment used to carry out the Group's business and is initially recognised at cost.

Owner occupied property is revalued to fair value at each reporting date. Depreciation, being the difference between the carrying amount and the residual value of each significant part of a building, is charged to the consolidated income statement over its useful life. The useful life of each significant part of a building is estimated as being between 30 and 50 years. A revaluation surplus is recognised in other comprehensive income unless it reverses a revaluation deficit which has been recognised in the consolidated income statement.

Equipment is subsequently measured at cost less depreciation. Depreciation is charged to the income statement over 2 to 15 years depending on the length of time the Group expects to derive benefit from the asset.

 

		Owner occupied property	Equipment	Total
	Notes	£m	£m	£m
Cost or valuation
At 1 January 2017		58	138	196
Additions		3	34	37
Acquired through business combinations		2	16	18
Transferred from investment property	17	17	-	17
Reclassified as held for sale during the year		(4)	(2)	(6)
Disposals and adjustments1		-	(3)	(3)
Revaluations		1	-	1
Impairment losses reversed		4	-	4
Foreign exchange adjustment		-	(1)	(1)
At 31 December 2017		81	182	263
Reclassified as held for sale during the year		(79)	(108)	(187)
Additions		-	28	28
Disposals and adjustments1		-	(4)	(4)
Foreign exchange adjustment		-	3	3
At 31 December 2018		2	101	103
Accumulated depreciation
At 1 January 2017		-	(107)	(107)
Depreciation charge for the year		-	(15)	(15)
Disposals and adjustments1		-	5	5
At 31 December 2017		-	(117)	(117)
Reclassified as held for sale during the year		-	91	91
Depreciation charge for the year	5	-	(16)	(16)
Disposals and adjustments1		-	2	2
Foreign exchange adjustment		-	(2)	(2)
At 31 December 2018		-	(42)	(42)
Carrying amount
At 1 January 2017		58	31	89
At 31 December 2017		81	65	146
At 31 December 2018		2	59	61

¹    For the year ended 31 December 2018 £nil (2017: £1m) of disposals and adjustments relates to equipment with net book value of £nil which is no longer in use.

If owner occupied property was measured using the cost model, the historical cost before impairment would be £2m (2017: £112m). As the expected residual value of owner occupied property is in line with the current fair value, no depreciation is currently charged.

19.   Financial investments

Management determines the classification of financial investments at initial recognition. Financial investments which are not derivatives and are not designated at fair value through profit or loss (FVTPL) are classified as either available-for-sale (AFS) or loans and receivables. The classification of derivatives is set out in Note 21.

The majority of the Group's debt securities and all equity securities and interests in pooled investment funds are designated at FVTPL as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis. These investments are recognised at fair value with changes in fair value recognised in investment return in the consolidated income statement. Commercial real estate loans are included within debt securities designated at fair value.

All other debt securities are classified as AFS and are recognised at fair value with changes in fair value recognised in other comprehensive income. Interest is credited to the consolidated income statement using the effective interest rate method. On disposal of an AFS security any gains or losses previously recognised in other comprehensive income are recognised in the consolidated income statement (recycling).

The accounting policies for other financial investments are detailed in the separate related notes indicated below.

 

		Designated as at fair value through profit or loss	Held for trading	Cash flow hedge	Available- for-sale	Loans and receivables	Total
2018	Notes	£m	£m	£m	£m	£m	£m
Derivative financial assets	21	-	8	13	-	-	21
Equity securities and interests in pooled investment funds	39	2,030	-	-	-	-	2,030
Debt securities	39	861	-	-	862	-	1,723
Receivables and other financial assets	22	8	-	-	-	700	708
Cash and cash equivalents	25	-	-	-	-	1,140	1,140
Total		2,899	8	13	862	1,840	5,622

 

		Designated as at fair value through profit or loss	Held for trading	Cash flow hedge	Available- for-sale	Loans and receivables	Total
2017	Notes	£m	£m	£m	£m	£m	£m
Loans	20	-	-	-	-	91	91
Derivative financial assets	21	-	3,053	-	-	-	3,053
Equity securities and interests in pooled investment funds	39	99,020	-	-	-	-	99,020
Debt securities	39	60,709	-	-	856	-	61,565
Receivables and other financial assets	22	6	-	-	-	1,236	1,242
Cash and cash equivalents	25	-	-	-	-	10,226	10,226
Total		159,735	3,053	-	856	11,553	175,197

The amount of debt securities expected to be recovered or settled after more than 12 months is £423m (2017: £50,619m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.

Following application of the temporary exemption granted in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments, the table below separately identifies financial assets with contractual cash flows that are solely payments of principal and interest (excluding those held for trading or managed on a fair value basis) and all other financial assets.

	Fair value as at 31 December 2018	Change in Fair Value during 2018
	£m	£m
Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis	2,702	2
Financial assets other than those above	2,920	(150)
Total	5,622	(148)

The credit exposure for the financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest above is as follows:

	Receivables and other financial assets	Debt securities	Cash and cash equivalents	Total
	Carrying amount	Carrying amount	Carrying amount	Carrying amount1
2018	£m	£m	£m	£m
Low Credit Risk Assets
AAA	-	23	181	204
AA	-	92	570	662
A	-	619	358	977
BBB	-	112	20	132
Internally rated/ not rated	700	-	8	708
Total	700	846	1,137	2,683

¹    Carrying amount applying IAS 39.

In addition, debt securities and cash and cash equivalents with fair value and carrying amount of £16m and £3m respectively at 31 December 2018 are rated below BBB.

Estimates and assumptions

Determination of the fair value of contingent consideration assets included in receivables and other financial assets is a key estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 41.

20.   Loans

Loans are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method, less any impairment losses.

 

		2018	2017
	Notes	£m	£m
Loans secured by mortgages	41(e)	-	57
Loans and advances to banks with greater than three months to maturity from acquisition date		-	32
Loans secured on policies		-	2
Loans	39	-	91

Loans with variable rates and fixed interest rates at 31 December 2017 were £38m and £53m respectively. Loans that were expected to be recovered after more than 12 months were £60m.

21.   Derivative financial instruments

A derivative is a financial instrument that is typically used to manage risk and whose value moves in response to an underlying variable such as interest or foreign exchange rates. The Group uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve efficient portfolio management. Certain consolidated investment vehicles also use derivatives to take and alter market exposure, with the objective of enhancing performance and controlling risk.

Management determines the classification of derivatives at initial recognition. All derivative instruments are classified as held for trading except those designated as part of a hedging relationship. Held for trading derivatives are measured at fair value with changes in fair value recognised in the consolidated income statement.

Using derivatives to manage a particular exposure is referred to as hedging. For a derivative to be considered as part of a hedging relationship its purpose must be formally documented at inception. In addition, the effectiveness of the hedge must be initially high and be able to be reliably measured on a regular basis. Derivatives used to hedge variability in future cash flows such as coupons payable on subordinated liabilities or revenue receivable in a foreign currency are designated as cash flow hedges, while derivatives used to hedge currency risk on investments in foreign operations are designated as net investment hedges.

Where a derivative qualifies as a cash flow or net investment hedge, hedge accounting is applied. The effective part of any gain or loss resulting from the change in fair value is recognised in other comprehensive income, and in the cash flow or net investment hedge reserve in equity, while any ineffective part is recognised immediately in the consolidated income statement. If a derivative ceases to meet the relevant hedging criteria, hedge accounting is discontinued.

For cash flow hedges, the amount recognised in the cash flow hedge reserve is transferred to the consolidated income statement (recycled) in the same period or periods during which the hedged item affects profit or loss and is transferred immediately if the cash flow is no longer expected to occur. For net investment hedges, the amount recognised in the net investment hedge reserve is transferred to the consolidated income statement on disposal of the investment.

 

		2018			2017
		Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	Notes	£m	£m	£m	£m	£m	£m
Cash flow hedges	19,33	589	13	-	562	-	33
Net investment hedges		6	-	-	6	-	-
Held for trading	19,33	625	8	6	160,838	3,053	780
Derivative financial instruments	39	1,220	21	6	161,406	3,053	813

Derivative assets of £13m (2017: £1,957m) are expected to be recovered after more than 12 months. Derivative liabilities of £nil (2017: £318m) are expected to be settled after more than 12 months. 

(a)     Cash flow hedges

On 18 October 2017, the Group issued subordinated notes with a principal amount of US$750m. In order to manage the foreign exchange risk relating to the principal and coupons payable on these notes the Group entered into a cross-currency swap which is designated as a cash flow hedge. The cross-currency swap has a fair value asset position of £13m (2017: £33m liability). During the year ended 31 December 2018 fair value gains of £54m (2017: £33m losses) were recognised in other comprehensive income in relation to the cross-currency swap. Gains of £35m (2017: £13m losses) and £6m (2017: gains of less than £1m) were transferred from other comprehensive income to Investment return and Finance costs respectively in the consolidated income statement in relation to the cross-currency swap during the year.

In addition, at 31 December 2017, foreign exchange contracts with an aggregate notional principal amount of £8m and a net fair value liability position of less than £1m were also designated as hedges of future cash flows arising from revenue receivable in foreign currency. There were no foreign exchange contracts designated as hedges of future cash flows arising from revenue receivable in foreign currency at 31 December 2018. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2018 and 2017, the ineffectiveness recognised in the consolidated income statement arising from cash flow hedges was less than £1m.

(b)     Net investment hedges

Forward foreign exchange contracts with a notional principal amount of £6m (2017: £6m) and a net fair value liability position of less than £1m (2017: net fair value asset position of less than £1m) were designated as net investment hedges and gave rise to losses for the year of less than £1m (2017: gains of less than £1m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2018, the losses recognised in the consolidated income statement were less than £1m (2017: less than £1m).

 (c)    Held for trading

Derivative financial instruments classified as held for trading include those that the Group holds as economic hedges of financial instruments that are measured at fair value. Held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.

	2018			2017
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Equity derivatives:
Futures	58	1	-	13,244	155	112
Variance swaps	4	4	-	13	44	50
Options	-	-	-	7,390	760	37
Total return swaps	-	-	-	714	4	16
Bond derivatives:
Futures	-	-	-	25,104	116	50
Interest rate derivatives:
Swaps	37	-	-	65,346	686	215
Floors	-	-	-	40	6	-
Futures	15	-	-	-	-	-
Swaptions	-	-	-	6,521	835	6
Foreign exchange derivatives:
Forwards	475	2	6	35,849	345	234
Other derivatives:
Inflation rate swaps	5	-	-	5,464	39	49
Credit default swaps	31	1	-	1,153	63	11
Derivative financial instruments held for trading	625	8	6	160,838	3,053	780

(d)     Maturity profile

The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows:

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	Total
2018	£m	£m	£m	£m	£m	£m	£m
Cash inflows
Derivative financial assets	34	88	714	-	-	-	836
Derivative financial liabilities	5	-	-	-	-	-	5
Total	39	88	714	-	-	-	841
Cash outflows
Derivative financial assets	(18)	(64)	(660)	-	-	-	(742)
Derivative financial liabilities	(10)	-	-	-	-	-	(10)
Total	(28)	(64)	(660)	-	-	-	(752)
Net derivative financial instruments cash inflows	11	24	54	-	-	-	89

Included in the above maturity profile are the following cash flows in relation to cash flow hedge liabilities:

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	Total
2018	£m	£m	£m	£m	£m	£m	£m
Cash inflows	25	88	714	-	-	-	827
Cash outflows	(18)	(64)	(660)	-	-	-	(742)
Net cash flow hedge cash inflows	7	24	54	-	-	-	85

Cash inflows and outflows are presented on a net basis where the Group is required to settle cash flows net.

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	Total
2017	£m	£m	£m	£m	£m	£m	£m
Cash inflows
Derivative financial assets	19,733	419	312	147	204	505	21,320
Derivative financial liabilities	11,095	98	118	566	3	-	11,880
Total	30,828	517	430	713	207	505	33,200
Cash outflows
Derivative financial assets	(18,731)	(27)	(21)	(15)	-	-	(18,794)
Derivative financial liabilities	(11,539)	(224)	(161)	(642)	(45)	(48)	(12,659)
Total	(30,270)	(251)	(182)	(657)	(45)	(48)	(31,453)
Net derivative financial instruments cash inflows	558	266	248	56	162	457	1,747

Included in the above maturity profile are the following cash flows in relation to cash flow hedge liabilities:

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	Total
2017	£m	£m	£m	£m	£m	£m	£m
Cash inflows	36	94	118	566	-	-	814
Cash outflows	(30)	(73)	(91)	(578)	-	-	(772)
Net cash flow hedge cash inflows/(outflows)	6	21	27	(12)	-	-	42

22.   Receivables and other financial assets

		2018	2017
	Notes	£m	£m
Amounts receivable on direct insurance business		-	71
Amounts receivable on reinsurance contracts		-	2
Amounts receivable from contracts with customers	4(b)	112	104
Outstanding sales of investment securities		1	125
Accrued income		220	388
Cancellations of units awaiting settlement		191	219
Collateral pledged in respect of derivative contracts	39	8	46
Property related assets		-	154
Contingent consideration asset	41	8	6
Other		168	127
Receivables and other financial assets		708	1,242

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

The amount of receivables and other financial assets expected to be recovered after more than 12 months is £10m (2017: £85m).

Accrued income includes £214m (2017: £249m) of accrued income from contracts with customers (see Note 4(b)).

23.   Other assets

		2018	2017
		£m	£m
Prepayments		38	72
Other		2	113
Other assets		40	185

The amount of other assets expected to be recovered after more than 12 months is £3m (2017: £7m).

24.   Assets and liabilities held for sale

Assets and liabilities held for sale are presented separately in the consolidated statement of financial position and consist of operations and individual non-current assets whose carrying amount will be recovered principally through a sale transaction (expected within one year) and not through continuing use.

Operations held for sale, being disposal groups, and investments in associates accounted for using the equity method are measured at the lower of their carrying amount and their fair value less disposal costs. No depreciation or amortisation is charged on assets in a disposal group once it has been classified as held for sale.

Operations held for sale include newly established investment vehicles which the Group has seeded but is actively seeking to divest from. For these investment funds, which do not have significant liabilities or non-financial assets, financial assets continue to be measured based on the accounting policies that applied before they were classified as held for sale. The Group classifies seeded operations as held for sale where the intention is to dispose of the investment vehicle in a single transaction. Where disposal of a seeded investment vehicle will be in more than one tranche the operations are not classified as held for sale in the consolidated statement of financial position.

Certain amounts seeded into funds are classified as investments in associates at FVTPL. Investment property and owner occupied property held for sale relates to property for which contracts have been exchanged but the sale had not completed during the current financial year. Investments in associates at FVTPL and investment property held for sale continue to be measured based on the accounting policies that applied before they were classified as held for sale.

 

		2018	2017
		£m	£m
Assets of operations held for sale
Standard Life (Asia) Limited		667	703
Investment vehicles		95	91
Investments in associates accounted for using the equity method		-	33
Investment and owner occupied property1		-	211
Assets held for sale		762	1,038
Liabilities of operations held for sale
Standard Life (Asia) Limited		643	678
Investment vehicles		14	28
Liabilities of operations held for sale		657	706

¹    The 2017 balance consisted of £199m of investment property and £12m of owner occupied property.

(a) Standard Life (Asia) Limited
On 29 March 2017, the Group announced the proposed sale of its wholly owned Hong Kong insurance business, Standard Life (Asia) Limited to the Group's Chinese joint venture business, Heng An Standard Life Insurance Company Limited. Standard Life (Asia) Limited is reported in the Asset management and platforms segment and Heng An Standard Life Insurance Company Limited is reported within the Insurance associates and joint ventures segment.

At 31 December 2018, this disposal group was measured at fair value less cost to sell and comprised the following assets and liabilities:

	2018	2017
	£m	£m
Assets of operations held for sale
Equity securities and interests in pooled investment funds	604	638
Cash and cash equivalents	33	31
Other assets	30	34
Total assets of operations held for sale	667	703
Liabilities of operations held for sale
Non-participating insurance contract liabilities	574	603
Non-participating investment contract liabilities	52	62
Other liabilities	17	13
Total liabilities of operations held for sale	643	678
Net assets of operations held for sale	24	25

Following the remeasurement of the disposal group to the lower of its carrying amount and its fair value less costs to sell, an impairment loss of £2m (2017: £24m) is included in Other administrative expenses in the consolidated income statement. Fair value has been determined by reference to the expected sale price.

Net assets of operations held for sale are net of intercompany balances between Standard Life (Asia) Limited and the rest of the Group. The net assets of Standard Life (Asia) Limited on a gross basis as at 31 December 2018 are £18m (2017: £17m).

 

(b) HDFC AMC
On 30 November 2017, HDFC AMC, which is reported within the Asset management and platforms segment, announced that its board of directors had approved initiation of the process of an initial public offering (IPO) subject to receipt of necessary approvals. As a result a portion of the paid-up equity share capital of HDFC AMC was classified as held for sale at 31 December 2017. The IPO completed in August 2018. Refer Note 1 for further details.

25.   Cash and cash equivalents

Cash and cash equivalents include cash at bank, money at call and short notice with banks, and any highly liquid investments (including reverse repurchase agreements) with less than three months to maturity from the date of acquisition, and are measured at amortised cost. For the purposes of the consolidated statement of cash flows, cash and cash equivalents also include bank overdrafts which are included in other financial liabilities on the consolidated statement of financial position.

Where the Group has a legally enforceable right of set off and intention to settle on a net basis, cash and overdrafts are offset in the consolidated statement of financial position.

 

		2018	2017
		£m	£m
Cash at bank and in hand		669	1,559
Money at call, term deposits and debt instruments with less than three months to maturity from acquisition		471	8,667
Cash and cash equivalents		1,140	10,226

 

		2018	2017
	Notes	£m	£m
Cash and cash equivalents		1,140	10,226
Cash and cash equivalents classified as held for sale	24	33	31
Bank overdrafts	37	(216)	(542)
Total cash and cash equivalents for consolidated statement of cash flows		957	9,715

Cash at bank, money at call and short notice and deposits are subject to variable interest rates.

Included in cash and cash equivalents and bank overdrafts are £566m (2017: £661m) and £216m (2017: £533m) relating to balances within a cash pooling facility in support of which cross guarantees are provided by certain subsidiary undertakings and interest is paid or received on the net balance. Included in cash and cash equivalents is an offsetting overdraft of £343m (2017: £118m) where the Group has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis.

Cash and cash equivalents in respect of unit linked funds (including third party interests in consolidated funds) are held in separate bank accounts and are not available for general use by the Group. A breakdown of cash and cash equivalents by risk segment is provided in Note 39.

26.   Issued share capital and share premium

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 Company's share capital consists of the number of ordinary shares in issue multiplied by their nominal value. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in share premium.

(a)     Issued share capital

The movement in the issued ordinary share capital of the Company was:

	2018			2017
Issued shares fully paid	12 2/9p each	13 61/63p each	£m	12 2/9p each	£m
At 1 January	2,978,936,877	-	364	1,978,884,437	242
Shares issued in respect of business combinations	-	-	-	997,661,231	122
Shares issued in respect of share incentive plans	435,340	288	-	496,817	-
Shares issued in respect of share options	350,156	-	-	1,894,392	-
New shares issued immediately prior to share consolidation	4	-	-	-	-
Share consolidation	(2,941,738,848)	2,574,021,492	-	-	-
Shares bought back on-market and cancelled	(37,983,529)	(44,609,556)	(11)	-	-
At 31 December	-	2,529,412,224	353	2,978,936,877	364

All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and entitlement to receive dividends and other distributions declared or paid by the Company.

On 22 October 2018, the Company undertook a share consolidation of the Company's share capital. 7 new ordinary shares of 13 61/63 pence each were issued for each holding of 8 existing ordinary shares of 12 2/9 pence each. As a result, the number of shares in issue reduced from 2,941,738,848 to 2,574,021,492.

On 25 June 2018, a share buyback of up to £750m through on-market purchases was approved by shareholders. As at 31 December 2018, the Company has bought back and cancelled 82,593,085 shares for a consideration (including transaction costs) of £238m. This consideration has resulted in a reduction in retained earnings of £238m. An amount of £11m has been credited to the capital redemption reserve relating to the nominal value of the shares cancelled.

Shares issued in respect of business combinations during 2017 related solely to the Aberdeen merger as discussed in Note 1.

The Company can issue shares to satisfy awards granted under employee incentive plans which have been approved by shareholders. Details of the Group's employee plans are provided in Note 45.

(b)     Return of capital 

2,941,738,848 B shares were issued for nil consideration with a nominal value of 33.99 pence each on 22 October 2018, resulting in a total of £1,000m being credited to the B share capital account. At the same time £1,000m was deducted from the merger reserve. On 24 October 2018 the B shares were redeemed at 33.99 pence each. An amount of £1,000m was deducted from the B share capital account and £1,000m was transferred from retained earnings to the capital redemption reserve. The costs of the B share scheme of £2m were recognised directly in equity.

(c)     Share premium

				2018	2017
				£m	£m
1 January				639	634
Shares issued in respect of share options				1	5
31 December				640	639

27.   Shares held by trusts

Shares held by trusts relates to shares in Standard Life Aberdeen plc that are held by the Employee Share Trust (EST), the Aberdeen Asset Management Employee Benefit Trust 2003 (EBT) and the Unclaimed Asset Trust (UAT).

The EST and EBT purchase shares in the Company for delivery to employees under employee incentive plans. Purchased shares are recognised as a deduction from equity at the price paid for them. Where new shares are issued to the EST or EBT the price paid is the nominal value of the shares. When shares are distributed from the trust their corresponding value is released to retained earnings.

In July 2006 Standard Life Group demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members were yet to claim their shares and the UAT held these on their behalf. There was an off-setting obligation to deliver these shares which was also recognised in the shares held by trust reserve. The shares and the off-setting obligation were both measured at £nil. The claim entitlement period for the UAT expired on 9 July 2016. Shares remaining in the UAT after 9 July 2016 continue to be measured at £nil.

The number of shares held by trusts at 31 December 2018 was as follows:

				2018	2017
Number of shares held by trusts
Employee Share Trust				31,589,855	16,031,679
Aberdeen Asset Management Employee Benefit Trust 2003				20,327,295	23,704,305
Unclaimed Asset Trust				153,020	180,766

On completion of the merger on 14 August 2017, 31,483,948 Aberdeen Asset Management PLC shares held by the EBT were exchanged for 23,833,349 Standard Life Aberdeen plc shares at a total nominal value of £3m.

On expiry of the claim period on 9 July 2016, the entitlement to the unclaimed shares remaining in the UAT transferred to the Company. During the year ended 31 December 2017, 11,719,073 shares were transferred from the UAT to the EST for £nil consideration. An amount equivalent to the fair value of the shares as at the date of transfer was donated by the Company to the Standard Life Foundation.

28.   Retained earnings

The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.

		2018	2017
	Notes	£m	£m
At 1 January		3,162	2,855
Recognised in comprehensive income
Recognised in profit for the year attributable to equity holders		830	699
Recognised in other comprehensive income
Remeasurement (losses)/gains on defined benefit pension plans	35	(29)	(18)
Share of other comprehensive income of associates and joint ventures		(15)	4
Aggregate tax items recognised in other comprehensive income		-	(10)
Total items recognised in comprehensive income		786	675
Recognised directly in equity
Dividends paid on ordinary shares		(634)	(469)
Redemption of B shares	26	(1,002)	-
Shares bought back on-market and cancelled	26	(238)	-
Transfer from other reserves on disposal of subsidiaries	1	99	-
Transfer between reserves on impairment of subsidiaries	29	570	-
Transfer for vested employee share-based payments		68	86
Sale of shares held by trusts		-	4
Reclassification of perpetual debt instruments to liability		-	19
Shares distributed by employee and other trusts		(33)	(8)
Total items recognised directly in equity		(1,170)	(368)
At 31 December		2,778	3,162

The 2017 transfer for vested employee share-based payments included £32m in relation to replacement awards granted to employees of Aberdeen which vested before the acquisition date and were recognised directly in retained earnings on acquisition.

29.   Movements in other reserves

In July 2006 Standard Life Group demutualised and during this process the merger reserve, the reserve arising on Group reconstruction and the special reserve were created.

Merger reserve: the merger reserve consists of two components. Firstly at demutualisation in July 2006 the Company issued shares to former members of the mutual company. The difference between the nominal value of these shares and their issue value was recognised in the merger reserve. The reserve includes components attaching to each subsidiary that was transferred to the Company at demutualisation based on their fair value at that date. Secondly following the completion of the merger of Standard Life plc and Aberdeen Asset Management PLC on 14 August 2017, an additional amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of Aberdeen Asset Management PLC and their fair value at that date. On disposal or impairment of a subsidiary any related component of the merger reserve is released to retained earnings.

Reserve arising on Group reconstruction: The value of the shares issued at demutualisation was equal to the fair value of the business at that date. The business's assets and liabilities were recognised at their book value at the time of demutualisation. The difference between the book value of the business's net assets and its fair value was recognised in the reserve arising on Group reconstruction. The reserve comprises components attaching to each subsidiary that was transferred to the Company at demutualisation. On disposal of such a subsidiary any related component of the reserve arising on Group reconstruction is released to retained earnings.

Special reserve: Immediately following demutualisation and the related initial public offering, the Company reduced its share premium reserve by court order giving rise to the special reserve. Dividends can be paid out of this reserve.

Capital redemption reserve: In August 2018, as part of the return of capital and share buyback (refer Note 26) the capital redemption reserve was created.

 

The following tables show the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.

		Revaluation of owner occupied property	Cash flow hedges	Foreign currency translation	Available-for-sale financial assets	Merger reserve	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Capital redemption reserve	Total
2018	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January		1	(17)	82	15	5,957	100	241	(1,879)	-	4,500
Recognised in other comprehensive income
Fair value losses on available-for-sale financial assets		-	-	-	(9)	-	-	-	-	-	(9)
Fair value gains on cash flow hedges		-	54	-	-	-	-	-	-	-	54
Revaluation of owner occupied property	18	2	-	-	-	-	-	-	-	-	2
Exchange differences on translating foreign operations		-	-	17	-	-	-	-	-	-	17
With profits funds: Associated UDS movement recognised in other comprehensive income		-	-	(5)	-	-	-	-	-	-	(5)
Items transferred to profit or loss from continuing operations	21	-	(41)	(2)	-	-	-	-	-	-	(43)
Items transferred to profit or loss on disposal of a subsidiary	1	-	-	(43)	-	-	-	-	-	-	(43)
Aggregate tax effect of items recognised in other comprehensive income		-	(2)	-	1	-	-	-	-	-	(1)
Total items recognised in other comprehensive income		2	11	(33)	(8)	-	-	-	-	-	(28)
Recognised directly in equity
Issue of B shares	26	-	-	-	-	(1,000)	-	-	-	-	(1,000)
Redemption of B shares	26	-	-	-	-	-	-	-	-	1,000	1,000
Shares bought back on-market and cancelled	26	-	-	-	-	-	-	-	-	11	11
Reserves credit for employee share-based payments		-	-	-	-	-	36	-	-	-	36
Transfer to retained earnings for vested employee share-based payments		-	-	-	-	-	(68)	-	-	-	(68)
Transfer between reserves on disposal of subsidiaries	1	(3)	-	-	-	(1,290)	-	-	1,194	-	(99)
Transfer between reserves on impairment of subsidiaries		-	-	-	-	(570)	-	-	-	-	(570)
Total items recognised directly within equity		(3)	-	-	-	(2,860)	(32)	-	1,194	1,011	(690)
At 31 December		-	(6)	49	7	3,097	68	241	(685)	1,011	3,782

 

The merger reserve includes £3,084m (2017: £4,650m) in relation to the Group's asset management businesses. This includes £2,601m (2017: £3,877m) relating to the merger with Aberdeen. Following the impairment of the Company's investments in its asset management entities (refer Section 9), £570m (2017: £nil) was transferred from the merger reserve to retained earnings to mitigate the impact on distributable reserves. £996m (2017: £nil) of the merger reserve relating to the asset management businesses was also utilised during the year for the issue of the B shares (refer note 26).

 

		Revaluation of owner occupied property	Cash flow hedges	Foreign currency translation	Available-for-sale financial assets	Merger reserve	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Total
2017	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January		-	-	104	15	2,080	57	241	(1,879)	618
Recognised in other comprehensive income
Fair value losses on cash flow hedges		-	(33)	-	-	-	-	-	-	(33)
Revaluation of owner occupied property	18	1	-	-	-	-	-	-	-	1
Exchange differences on translating foreign operations		-	-	(32)	-	-	-	-	-	(32)
With profits funds: Associated UDS movement recognised in other comprehensive income	31	-	-	12	-	-	-	-	-	12
Items transferred to the consolidated income statement	21	-	13	(2)	-	-	-	-	-	11
Aggregate tax effect of items recognised in other comprehensive income		-	3	-	-	-	-	-	-	3
Total items recognised in other comprehensive income		1	(17)	(22)	-	-	-	-	-	(38)
Recognised directly in equity
Shares issued in respect of business combinations		-	-	-	-	3,877	-	-	-	3,877
Reserves credit for employee share-based payments		-	-	-	-	-	96	-	-	96
Transfer to retained earnings for vested employee share-based payments		-	-	-	-	-	(54)	-	-	(54)
Aggregate tax effect of items recognised directly in equity		-	-	-	-	-	1	-	-	1
Total items recognised directly within equity		-	-	-	-	3,877	43	-	-	3,920
At 31 December		1	(17)	82	15	5,957	100	241	(1,879)	4,500

The 2017 reserves credit for employee share-based payments included £57m in relation to replacement awards granted to employees of Aberdeen which were unvested at the acquisition date.

30.   Non-controlling interests

Non-controlling interests include preference shares. In addition, the perpetual notes issued by Standard Life Aberdeen plc and Aberdeen Asset Management PLC were classified as equity whilst no contractual obligation to deliver cash existed.

(a)     Non-controlling interests - ordinary shares

Non-controlling interests - ordinary shares of £2m were held at 31 December 2018 (2017: £289m). A reconciliation of movements during the year is provided in Note 42.

Included in non-controlling interests - ordinary shares of £289m at 31 December 2017 was non-controlling interests of Standard Life Private Equity Trust plc (SLPET) of £269m which was, prior to the sale of the UK and European insurance business, considered material to the Group. Non-controlling interests owned 44% of the voting rights of SLPET at 31 December 2017. SLPET ceased to be a subsidiary on the completion of the sale of the UK and European insurance business on 31 August 2018. The profit allocated to non-controlling interests of SLPET for the year ended 31 December 2018 is £5m (2017: £24m). Dividends paid to non-controlling interests of SLPET during the year ended 31 December 2018 were £8m (2017: £7m). The 2018 profit allocation and dividends relate to the period from 1 January 2018 to 31 August 2018 and were not material to the Group.

Summarised financial information for SLPET prior to intercompany eliminations for the year ended 31 December 2017 is provided in the following table. The summarised financial information is for the year ended 30 September 2017 which was SLPET's 2017 financial reporting date and was considered indicative of the interest that non-controlling interests of SLPET had in the Group's activities and cash flows. The financial statements of SLPET for the year ended 30 September 2017 were adjusted for market movements and any other significant events or transactions for the three months to 31 December 2017 for the purposes of consolidation into the Group's consolidated financial statements for the year ended 31 December 2017.

		2017
SLPET 30 September		£m
Statement of financial position:
Total assets		600
Total liabilities		1
Income statement:
Revenue		89
Profit after tax		81
Total comprehensive income		81
Cash flows:
Cash flows from operating activities		2
Cash flows from investing activities		1
Cash flows from financing activities		(15)
Net (decrease)/increase in cash equivalents		(12)

There were no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.

(b)     Non-controlling interests - preference shares and perpetual instruments

	2018	2017
	£m	£m
5% 2015 Non-voting perpetual non-cumulative redeemable preference shares	99	99

 

On the acquisition of Aberdeen, the Group recognised preference shares and perpetual capital notes issued by Aberdeen Asset Management PLC as non-controlling interests. The profit attributable to non-controlling interests from continuing operations for the year ended 31 December 2018 totalled £5m (2017: £8m) being £5m (2017: £nil) in respect of the preference shares and £nil (2017: £8m) in respect of perpetual debt instruments. The profit attributable to non-controlling interests from discontinued operations for the year ended 31 December 2018 totalled £33m (2017: £25m) being £5m (2017: £25m) in respect of ordinary shares and £28m (2017: £nil) in respect of perpetual debt instruments.

(b)(i) Preference shares

The preference shares have no fixed redemption date, except at the sole discretion of the issuer after the fifth anniversary from issue. Preference share dividends are discretionary and where declared, are paid in arrears in two tranches at a rate of 5% per annum and are non-cumulative. No interest accrues on any cancelled or unpaid dividends. During the year ended 31 December 2018 preference share dividends of £5m (2017: £nil) were paid. 

The preference shares can be converted irrevocably into a fixed number of ordinary shares of Aberdeen Asset Management PLC in the event of the conversion trigger. The conversion trigger occurs if Aberdeen Asset Management PLC's Common Equity Tier 1 ('CET1') capital ratio falls below 5.125%. The CET1 ratio (unaudited) at 31 December 2018 was 34.4% (2017: 36.2%).

 (b)(ii) Perpetual debt instruments

6.75% Sterling fixed rate perpetual subordinated guaranteed bonds and 6.546% Sterling fixed rate perpetual Mutual Assurance Capital Securities

From the date of the repayment of a £100 internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company on 30 August 2018, the perpetual subordinated guaranteed bonds and Mutual Assurance Capital Securities (MACS) issued by the Company were reclassified to equity from subordinated liabilities (see Note 34). The perpetual subordinated guaranteed bonds and MACS were recognised in equity at their fair value of the subordinated debt liabilities at 30 August 2018 of £672m and £334m respectively. The Group recognised a fair value loss of £198m on the reclassification which is included in Restructuring and corporate transaction expenses from discontinued operations (see Note 8).

The prior classification as liabilities was determined by the interaction of these perpetual debt instruments with the £100 internal subordinated loan note. There was no fixed redemption date for the internal loan note, but interest payments could not be deferred and had to be paid on the date they became due and payable. Under the terms for the guaranteed bonds and MACS any interest deferred on these instruments would have become immediately due and payable on the date of an interest payment in respect of the internal loan note. The existence of the internal loan note therefore removed the discretionary nature of the interest payments on the subordinated guaranteed bonds and MACS, and resulted in their classification as liabilities.

Following a tender and mandatory redemption process which completed on 25 October 2018, the Company repurchased/redeemed the guaranteed bonds and MACS for £703m and £336m respectively (including accrued interest and fees). The difference between the carrying value of the guaranteed bonds and MACS and the cost of the repurchase and mandatory redemption of £21m (net of tax) was recognised directly as profit attributable to non-controlling interests. 

The guaranteed bonds bore interest on their principal amount at 6.75% per annum payable annually in arrears on 12 July. The MACS bore interest on their principal amount at 6.546% per annum payable annually in arrears on 4 November. The coupons payable on the guaranteed bonds and MACS were tax deductible. During the year ended 31 December 2018 £7m (net of tax) (2017: £nil) was recognised directly in equity as profit attributable to non-controlling interests in relation to the coupons payable on the guaranteed bonds and MACS.

7.0% US Dollar fixed rate perpetual capital notes

Until 18 December 2017, the perpetual capital notes were classified as equity. On this date Aberdeen Asset Management PLC notified the trustees of the perpetual capital notes of its irrevocable intention to redeem the notes on the first call date, 1 March 2018. Following notification to the trustees the perpetual capital notes were reclassified as subordinated liabilities as an obligation to deliver cash was created. The liabilities were recognised at fair value of £380m on 18 December 2017 with fair value movements since acquisition of £17m being transferred to retained earnings at this date. On reclassification £2m in relation to tax allocated to non-controlling interests was also transferred to retained earnings. The perpetual capital notes were redeemed on 1 March 2018. Refer Note 34.

The perpetual capital notes bore interest on their principal amount at 7.0% per annum, the discretionary coupons were payable quarterly in arrears on 1 March, 1 June, 1 September and 1 December in each year. Interest accrued on any deferred payments. The coupons payable on perpetual notes were tax deductible. During the year ended 31 December 2018 £nil (2017: £8m (net of tax)) was recognised directly in equity as profit contributable to non-controlling interests in relation to the coupons payable on the perpetual capital notes.