Standard Life Aberdeen plc

Full Year Results 2017

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 2017 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; Company statement of cash flows and the related notes, including the accounting policies and the reconciliation of consolidated adjusted profit before tax to IFRS profit for the year.

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 2017 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 (IFRSs as adopted by the EU);

·  The parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

·  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 audit committee.

We were appointed as auditor by the shareholders on 16 May 2017.  The period of total uninterrupted engagement is for the one financial year ended 31 December 2017.  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.

1.          Overview
Materiality: group financial statements as a whole	£38m 4.5% of normalised profit before tax
2.          Coverage	72% of total profits and losses that made up Group profit before tax
3.          Risks of material misstatement
4.          Event driven	Acquisition of Aberdeen Asset Management plc - goodwill and intangible assets
5.          Recurring risks	Valuation of Non-Participating Insurance Contract Liabilities
	Valuation of the provision for annuity sales practices
	Valuation of intangible assets
	Valuation of complex financial instruments and investment property
	Valuation of the UK defined benefit pension scheme present value of funded 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 decreasing order of audit significance, 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
Acquisition of Aberdeen Asset Management - Goodwill and Intangible assets: (Goodwill £3,209 million) (Intangible assets £865 million) Refer to page 84 (Audit Committee Report), page 156 (accounting policy) and page 159 (financial disclosures).	Subjective estimate: On acquisition, separate intangible assets must be identified and valued.  Both the identification of each category of intangible asset and the valuation of these assets are highly sensitive to underlying assumptions of the duration and level of future cash flows and discount rates. The Directors have exercised judgement in identifying and estimating the fair value of the separately identifiable intangibles comprising customer relationships, brand and technology as part of the acquisition. The fair value of these intangible assets recognised in the business combination accounting is £865 million. There would be a corresponding impact on the amount of goodwill recognised of £3,209 million if alternative assumptions had been adopted; in future periods goodwill will not be amortised, but intangible assets will be.	Our procedures included: ·  Our sector experience: We considered the rationale for the acquisition to challenge the identification of intangible assets. We inspected publically available documents including the prospectus, inspected board minutes and discussed with Directors. ·  Our business combination expertise: Using our own valuation specialists we challenged the Group's identification and valuation analysis prepared by management and third party valuations experts who assisted management, which was the basis for the determination of the fair value of the intangible assets used in the business combination accounting; ·  Assessing Transparency: We assessed the Group's disclosures regarding the acquisition and estimation assumptions and whether they have been disclosed appropriately. Our results  We found the identification and valuation of intangibles assets and goodwill acquired to be acceptable.

 

	The risk	Our response
Valuation of Non-Participating Insurance Contract Liabilities (£22,740 million; 2016: £23,422 million) Refer to page 84 (Audit Committee Report), page 196 (accounting policy) and page 199 (financial disclosures).	Subjective estimate: The Group has significant non-participating insurance contract liabilities representing 12 per cent of the Group's total liabilities. The liabilities are required to be measured at the discounted value of uncertain future settlement amounts, which involves significant judgment as to key operating and economic assumptions. The key operating assumptions are mortality (base) and longevity (mortality improvement).  The key economic assumption in setting the discount rate is the allowance for credit risk.  The risk is that inappropriate assumptions are utilised in determining the valuation of the insurance contract liabilities.	·  Our actuarial expertise: We used our own actuarial specialists to perform procedures in this area. ·  Control design and operation: We tested the design, implementation and operating effectiveness of key controls over operating and economic assumption setting. ·  Tests of details and our sector experience: We assessed the mortality assumption by reference to company and industry data on historical mortality experience.  We assessed the longevity assumptions by reference to evaluation of the Group's internal cause-of-death model and industry based expectations of future longevity. We assessed the credit risk assumption by reference to the Group's investment portfolio and industry practice. ·  Benchmarking assumptions and our sector experience: We utilised the results of KPMG benchmarking of longevity and credit risk assumptions and our knowledge of relevant peers to inform our challenge of these assumptions. ·  Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the calculation of insurance contract liabilities appropriately represent the sensitivities of the liabilities to the use of alternative assumptions. Our results We found the valuation of insurance contract liabilities to be acceptable.
Valuation of the provision for annuity sales practice (£248 million; 2016: £175million) Refer to page 84 (Audit Committee Report), page 212 (accounting policy) and page 212 (financial disclosures).	Subjective estimate: The Group has a provision for the costs arising from a review of non-advised annuity sales at the request of the Financial Conduct Authority ('FCA').  This is an area that involves significant judgement over the redress payable to customers.  The Group is required to use judgment in the selection of key assumptions which are used to calculate the provision.  The key assumptions are the number of customers entitled to redress and the average annual amount of redress payable to those customers.	·  Tests of detail: We assessed the judgements made in determining the assumptions by reference to: -      FCA data on the proportion of the population that could have benefited from an enhanced annuity; -      Group data on rates of potential non-compliance with FCA sales practice requirements; -      Industry data on medical conditions prevalent in the UK population; -      And average annual uplifts to annuities such customers would have obtained ·  Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the calculation of the provision appropriately represent the sensitivity of the provision to the use of alternative assumptions; Our results  We found the valuation of the provision to be acceptable.
	The risk	Our response
Valuation of intangible assets (Customer relationships and investment management contracts £774 million; 2016: £154 million) (Internally generated software assets not yet available for use £53 million; 2016: £56 million) Refer to page 84 (Audit Committee Report), page 178 (accounting policy) and page 178 (financial disclosures).	Subjective valuation: The Group's intangible assets primarily comprise of customer relationships and investment management contracts and internally generated software. 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 £774 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 the customer relationship and investment management contract intangibles. Internally generated software assets not yet available for use comprise £53m of the intangible asset balance. The risk is that the recoverable amount associated with the assets not yet available for use is less than the capitalised amount.	Customer relationships and investment management contracts acquired in business combinations: ·  Our valuation expertise: We involved our own valuation specialists to assist in evaluating the appropriateness of discount rates applied, which included recalculating discount rates on a market participant basis using comparable company information. We evaluated whether there had been 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. Where indicators were identified, we assessed management's valuation model. ·  Our sector experience: Where there was an indicator of impairment, we evaluated the appropriateness of assumptions applied in key inputs such as fee revenue, 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. Internally generated software not yet available for use: ·  Tests of detail: We challenged the Group's assessment of the continuing technical feasibility of completing a sample of the internally generated software assets that were not yet available for use by reference to project plans and design specifications. We used our own IT specialists to perform procedures in this area. We evaluated the Group's calculations of recoverable amount by reference to the determination of the cash generating unit and the associated discounted cash flow. Our results  We found the valuation of intangible assets to be acceptable.

 

	The risk	Our response
Valuation of level 3 financial instruments and investment property (£12,488 million; 2016: £12,059 million) Refer to page 84 (Audit Committee Report), page 235 (accounting policy) and page 241 (financial disclosures).	Subjective valuation: Within the Group's investment portfolio, the valuation of certain assets requires significant judgement as a result of quoted prices being unavailable and limited liquidity in these markets. The asset categories where significant audit effort and judgement was focussed were investment property, commercial mortgages, private equity and debt securities. These holdings together represented 7 per cent of the total investment assets. For each of these valuations there is a degree of complexity and subjectivity: Investment property valuations require assumptions to be made such as expected rental yields in order to determine future rental income. Independent property experts assist the Directors in selecting these assumptions. Directors use judgement to select the methodology to which these assumptions are applied in order to derive the valuation. Unquoted private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation guidelines by using underlying fund manager valuations as a basis. These are adjusted where considered appropriate. There is a significant risk over the valuation of these investments. The valuation of commercial mortgages require judgement in determining the discount rate over future cash flows particularly in relation to the credit risk of borrowers.	Investment property ·  Our valuation expertise: We used our own property valuation specialists to assess the key inputs and assumptions used by external valuers by reference to our own market and industry benchmarks. Key assumptions were forecast rent, yield and vacant periods for property. ·  Methodology Choice: We considered the pricing model methodologies with reference to Royal Institution of Chartered Surveyors Valuation - Professional Standards (the 'Red Book'). Unquoted investments and commercial mortgages: Our valuation expertise: -      For unquoted debt securities and commercial mortgages we evaluated the assumptions used, in particular credit risk assumptions in formulating the discount rate. -      For private equity funds we challenged the investment manager on key judgements affecting investee company valuations, including any adjustments made to the independent valuation produced by the underlying fund manager of the private equity funds. ·  Methodology choice: We assessed the pricing model methodologies used with reference to the International Private Equity and Venture Capital Valuation guidelines for funds and matrix pricing and discounted cash flow methodologies for unlisted debt. ·  Assessing transparency: Consideration of the appropriateness, in accordance with relevant accounting standards, of the disclosures in respect of complex financial instruments and the effect of changing one or more inputs to reasonably possible alternative valuation assumptions. Our results  We found the valuation of investments to be acceptable.

 

	The risk	Our response
Valuation of the UK defined benefit pension scheme present value of funded obligation (£2,839 million; 2016: £3,207million) Refer to page 84 (Audit Committee Report), page 205 (accounting policy) and page 206 (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.	·  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 present value of the funded obligation to be acceptable.
Recoverability of parent company's investment in subsidiaries (£9,425 million; 2016: £4,769 million) Refer to page 269 (accounting policy and financial disclosures).	Low risk, high value The carrying amount of the parent company's investments in subsidiaries represents 87% (2016: 80%) of the company's total assets.  Their recoverability is not at a high risk of significant misstatement or subject to significant judgement.  However, due to their materiality in the context of the parent company financial statements, this is considered to be the area of most focus in the overall parent company audit.	Our procedures included: ·  Tests of detail: We compared the carrying amount of 100% of the investment balance with the relevant subsidiaries' financial statements/draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making. ·  Assessing subsidiary audits: We assessed the work performed by the subsidiary audit teams and considering the results of that work to date on those subsidiaries' profits and net assets ·  Our sector experience: For the investments where the carrying amount exceeded the net asset value, we compared the carrying amount of the investment with the expected value of the business based on the method applied by management in valuing the business. We assessed the key inputs to this valuation to determine whether they were reasonable. Our results  We found the group's assessment of the recoverability of the investment in subsidiaries to be acceptable.

 

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 £38m, determined with reference to a benchmark of group profit before tax, normalised to exclude the policyholder tax gross up (as explained in Note 10 to the financial statements), to exclude the impact of the increase in the provision for annuity sales practices, to exclude impairment, to exclude restructuring costs and to exclude the profit on disposal of associates as disclosed in note 38, note 14, note 9, and note 24 respectively. Materiality represents 4.5% of normalised profit before tax.

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

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £2m, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Of the group's 227 reporting components, (of which 160 are consolidated funds), we subjected 19 to full scope audits for group purposes. A further 13 components were scoped in for audit procedures over specific account balances. These components for which we performed work other than audits for group reporting purposes were not individually significant but were included in the scope of our group reporting work in order to provide further coverage over the group's results. We conducted reviews of financial information (including enquiry) at a further 1 non-significant component as whilst the component was determined to be non-significant we wanted to ensure we understood financial performance and to confirm our assessment of no significant risk of material misstatement.  

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

The remaining 21% of total group revenue, 28% of group total profits and losses that made up the group profit before tax and 18% of total group assets is represented by 194 of reporting components, none of which individually represented more than 2% of any of total group revenue, total profits and losses that made up Group profit before tax 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 £11m to £34m, having regard to the mix of size and risk profile of the Group across the components.  The work on 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.

The Group team visited 18 of the component locations (excluding consolidated funds) to assess the audit risk and strategy. Video and telephone conference meetings were also held with these component auditors and certain others that were not physically visited. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the group team was then performed by the component auditor.

4.     We have nothing to report on going concern

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 section (a) on page 154 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 twelve months from the date of approval of the financial statements; or   

·  The related statement under the Listing Rules set out on page 61 is materially inconsistent with our audit knowledge

We have nothing to report in these respects.

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; and 

·  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 38 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; and 

·  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.

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; or 

·  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; or 

·  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; or certain disclosures of directors' remuneration specified by law are not made; or 

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

·  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 135, 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, other irregularities, 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.  The risk of not detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and regulation not just those directly affecting 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 sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group's regulatory and legal correspondence.

We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation.  We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statements items.

In addition we considered the impact of laws and regulations in the specific areas of regulatory capital (recognising the importance of this to the continuing operation of the company) and regulatory conduct (recognising the potential for economic outflow associated with non-compliance). With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related financial statements items.  Further detail in respect of the valuation of provision for annuity sales practices is set out in the key audit matter disclosures in section 2 of this report.

We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.  This included communication from the group to component audit teams of relevant laws and regulations identified at group level, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team.

As with any audit, there remained a higher risk of non-detection of non-compliance with relevant laws and regulations (irregularities), as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.

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

23 February 2018

 

8. Group financial statements

Consolidated income statement

For the year ended 31 December 2017

		2017	20161
	Notes	£m	£m
Revenue
Investment return	4	12,774	15,376
Fee income	5	1,686	1,186
Insurance and participating investment contract premium income	31	2,143	2,092
Profit on disposal of interests in associates	1	319	-
Other income		58	75
Total revenue		16,980	18,729
Expenses
Insurance and participating investment contract claims and change in liabilities	31	3,628	7,126
Change in non-participating investment contract liabilities	32	8,963	8,768
Administrative expenses
Restructuring and corporate transaction expenses	9	176	62
Other administrative expenses	6	1,982	1,494
Total administrative expenses		2,158	1,556
Provision for annuity sales practices	38	100	175
Change in liability for third party interest in consolidated funds	42	1,124	296
Finance costs		88	82
Total expenses		16,061	18,003
Share of profit from associates and joint ventures		45	63
Profit before tax		964	789
Tax expense attributable to policyholders' returns	10	166	302
Profit before tax expense attributable to equity holders		798	487
Total tax expense	10	232	370
Less: Tax expense attributable to policyholders' returns	10	(166)	(302)
Tax expense attributable to equity holders	10	66	68
Profit for the year		732	419
Attributable to:
Equity holders of Standard Life Aberdeen plc		699	368
Non-controlling interests
Ordinary shares	30	25	51
Preference shares and perpetual notes	30	8	-
		732	419
Earnings per share
Basic (pence per share)	11	29.8	18.7
Diluted (pence per share)	11	29.6	18.6

¹    The presentation of the consolidated income statement has changed from the prior year. Detail on breakdown of insurance related income and expenses which was previously shown on the face of the income statement is now included in Note 31.

 

Consolidated statement of comprehensive income

For the year ended 31 December 2017

		2017	2016
	Notes	£m	£m
Profit for the year		732	419
Items that will not be reclassified subsequently to profit or loss:
Remeasurement (losses)/gains on defined benefit pension plans	35	(18)	162
Revaluation of owner occupied property	18	1	5
Change in unallocated divisible surplus	29	-	(5)
Equity holder tax effect of items that will not be reclassified subsequently to profit or loss	10	(10)	2
Total items that will not be reclassified subsequently to profit or loss		(27)	164
Items that may be reclassified subsequently to profit or loss:
Fair value losses on cash flow hedges	29	(33)	-
Fair value gains on available-for-sale financial assets	29	-	17
Exchange differences on translating foreign operations	29	(32)	173
Change in unallocated divisible surplus	29	12	(62)
Share of other comprehensive income/(expense) of associates and joint ventures	28	4	(10)
Items transferred to the consolidated income statement
Realised losses on cash flow hedges	21	13	-
Realised foreign exchange gains	1	(2)	-
Equity holder tax effect of items that may be reclassified subsequently to profit or loss	10	3	(3)
Total items that may be reclassified subsequently to profit or loss		(35)	115
Other comprehensive income for the year		(62)	279
Total comprehensive income for the year		670	698
Attributable to:
Equity holders of Standard Life Aberdeen plc		637	647
Non-controlling interests
Ordinary shares		25	51
Preference shares and perpetual notes		8	-
		670	698

 

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

For the year ended 31 December 2017

		2017	2016 restated1
	Notes	£m	£m
Adjusted profit/(loss) before tax
Aberdeen Standard Investments2		492	386
Pensions and Savings		381	362
India and China life		59	36
Other		(78)	(66)
Adjusted profit before tax	2	854	718
Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes	12	67	13
Restructuring and corporate transaction expenses	9	(173)	(67)
Amortisation and impairment of intangible assets acquired in business combinations	2	(138)	(38)
Provision for annuity sales practices	38	(100)	(175)
Coupons payable on perpetual notes classified as equity3	12	10	-
Profit on disposal of interests in associates	1	319	-
Other4		(25)	(2)
Total adjusting items	2	(40)	(269)
Share of associates' and joint ventures' tax expense	2	(41)	(13)
Profit attributable to non-controlling interests - ordinary shares	2	25	51
Profit before tax expense attributable to equity holders 5		798	487
Tax (expense)/credit attributable to
Adjusted profit	2	(108)	(126)
Adjusting items	2	42	58
Total tax expense attributable to equity holders		(66)	(68)
Profit for the year		732	419

¹    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the Other segment, a £3m increase to the Aberdeen Standard Investments segment and a corresponding £5m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.

²    Previously Standard Life Investments. Refer Note 2 for further details.

³    On 18 December 2017, perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details.

⁴    Other adjusting items for the year ended 31 December 2017 includes £24m (2016: £nil) in relation to the impairment of a disposal group classified as held for sale. Refer Note 24 for further details.

⁵    Profit before tax expense attributable to equity holders consists of profit before tax of £964m (2016: £789m) less tax expense attributable to policyholders' returns of £166m (2016: £302m).

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

 

Consolidated statement of financial position

As at 31 December 2017

		2017	2016
	Notes	£m	£m
Assets
Intangible assets	14	4,514	572
Deferred acquisition costs	15	612	651
Investments in associates and joint ventures accounted for using the equity method1	16	503	572
Investment property	17	9,749	9,929
Property, plant and equipment	18	146	89
Pension and other post-retirement benefit assets	35	1,099	1,093
Deferred tax assets	10	65	42
Reinsurance assets	31	4,811	5,386
Loans	19	91	295
Derivative financial assets	19	3,053	3,534
Equity securities and interests in pooled investment funds1	19	99,020	90,683
Debt securities	19	61,565	67,933
Receivables and other financial assets	19	1,242	1,255
Current tax recoverable	10	192	166
Other assets	23	185	94
Assets held for sale	24	1,038	263
Cash and cash equivalents	19	10,226	7,938
Total assets		198,111	190,495
Equity
Share capital	26	364	242
Shares held by trusts	27	(61)	(2)
Share premium reserve	26	639	634
Retained earnings	28	3,162	2,855
Other reserves	29	4,500	618
Equity attributable to equity holders of Standard Life Aberdeen plc		8,604	4,347
Non-controlling interests
Ordinary shares	30	289	297
Preference shares	30	99	-
Total equity		8,992	4,644
Liabilities
Non-participating insurance contract liabilities	31	22,740	23,422
Non-participating investment contract liabilities	32	105,769	102,063
Participating contract liabilities	31	30,647	31,273
Deposits received from reinsurers	33	4,633	5,093
Third party interest in consolidated funds	33	16,457	16,835
Subordinated liabilities	33	2,253	1,319
Pension and other post-retirement benefit provisions	35	78	55
Deferred income	36	157	198
Deferred tax liabilities	10	367	259
Current tax liabilities	10	166	113
Derivative financial liabilities	21	813	965
Other financial liabilities	33	3,896	3,916
Provisions	38	316	227
Other liabilities	38	121	113
Liabilities of operations held for sale	24	706	-
Total liabilities		189,119	185,851
Total equity and liabilities		198,111	190,495

 

¹    Presentation changed and 2016 comparative restated. Refer Note 16(c).

The consolidated financial statements on pages 147 to 264 were approved by the Board and signed on its behalf by the following Directors:

Sir Gerry Grimstone	Bill Rattray
Chairman, 23 February 2018	Chief Financial Officer, 23 February 2018

 

Consolidated statement of changes in equity

For the year ended 31 December 2017

								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		-	-	-	699	-	699	25	8	732
Other comprehensive income for the year		-	-	-	(24)	(38)	(62)	-	-	(62)
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 combination	1	-	-	-	-	-	-	-	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	10	-	-	-	-	1	1	-	2	3
31 December		364	(61)	639	3,162	4,500	8,604	289	99	8,992

 

 

		Share capital	Shares held by trusts	Share premium reserve	Retained earnings	Other reserves	Total equity attributable to equity holders of Standard Life Aberdeen plc	Non-controlling interests	Total equity
2016	Notes	£m	£m	£m	£m	£m	£m	£m	£m
1 January		241	(6)	628	2,162	977	4,002	347	4,349
Profit for the year		-	-	-	368	-	368	51	419
Other comprehensive income for the year		-	-	-	154	125	279	-	279
Total comprehensive income for the year	28, 29	-	-	-	522	125	647	51	698
Issue of share capital	26	1	-	6	-	-	7	-	7
Dividends paid on ordinary shares	13	-	-	-	(370)	-	(370)	-	(370)
Reserves credit for employee share-based payments	29	-	-	-	-	30	30	-	30
Transfer to retained earnings for vested employee share-based payments	28, 29	-	-	-	23	(23)	-	-	-
Shares acquired by employee trusts		-	(3)	-	-	-	(3)	-	(3)
Shares distributed by employee and other trusts	28	-	7	-	(7)	-	-	-	-
Expiry of unclaimed asset trust claim period	28	-	-	-	41	-	41	-	41
Cancellation of capital redemption reserve	29	-	-	-	488	(488)	-	-	-
Other movements in non-controlling interests in the period		-	-	-	-	-	-	(101)	(101)
Aggregate tax effect of items recognised directly in equity	10	-	-	-	(4)	(3)	(7)	-	(7)
31 December		242	(2)	634	2,855	618	4,347	297	4,644

 

 

Consolidated statement of cash flows

For the year ended 31 December 2017

		2017	2016
	Notes	£m	£m
Cash flows from operating activities
Profit before tax		964	789
Change in operating assets	42	1,351	(12,995)
Change in operating liabilities	42	(84)	12,926
Adjustment for non-cash movements in investment income		40	174
Change in unallocated divisible surplus	31	140	53
Other non-cash and non-operating items	42	3	122
Taxation paid		(220)	(333)
Net cash flows from operating activities		2,194	736
Cash flows from investing activities
Purchase of property, plant and equipment	18	(37)	(10)
Proceeds from sale of property, plant and equipment		-	22
Proceeds from sale of seeding investments		19	-
Acquisition of subsidiaries and unincorporated businesses net of cash acquired		495	(5)
Disposal/(acquisition) of investments in associates and joint ventures	1	359	(179)
Purchase of intangible assets		(69)	(61)
Net cash flows from investing activities		767	(233)
Cash flows from financing activities
Repayment of other borrowings		(1)	(2)
Proceeds from issue of subordinated liabilities		565	-
Capital flows to third party interest in consolidated funds and non-controlling interests - ordinary shares		(1,011)	(1,845)
Distributions paid to third party interest in consolidated funds and non-controlling interests - ordinary shares		(109)	(109)
Shares acquired by trusts		(61)	(3)
Sale of shares held by trusts		4	-
Proceeds from issue of shares	26	5	6
Interest paid		(97)	(83)
Ordinary dividends paid	13	(469)	(370)
Net cash flows from financing activities		(1,174)	(2,406)
Net increase/(decrease) in cash and cash equivalents		1,787	(1,903)
Cash and cash equivalents at the beginning of the year		7,900	9,591
Effects of exchange rate changes on cash and cash equivalents		28	212
Cash and cash equivalents at the end of the year	25	9,715	7,900
Supplemental disclosures on cash flows from operating activities
Interest paid		4	3
Interest received		1,710	1,929
Dividends received		2,086	2,023
Rental income received on investment property		503	564

 

 

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) Amendments to existing standards that have been adopted by the Group

The Group has adopted the following new amendments to existing standards which have been endorsed by the EU.

Interpretation or amendment	Effective Date	Detail
Amendments to IAS 7 Statement of Cash Flows : Disclosure Initiative	1 January 2017	The amendment requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash movements.
Amendments to IAS 12 Income Taxes : Recognition of Deferred Tax Assets for Unrealised Losses	1 January 2017	These amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset.

The Group's accounting policies have been updated to reflect these and additional disclosures in respect of liabilities arising from financing activities have been added to Note 42. 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 2017. The Group has not early adopted the standards, amendments and interpretations described below:

IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018)

IFRS 15 will replace IAS 18 Revenue and related interpretations. IFRS 15 provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. New disclosure requirements including estimate and judgement thresholds will also be introduced.

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 scope of IFRS 4 Insurance Contracts

·   Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements

·  Investments in associates and joint ventures within scope of IAS 28 Investments in Associates and Joint Ventures

In 2015 the IASB issued amendments to the standard and delayed the mandatory adoption date until 1 January 2018. A detailed impact assessment was completed in 2017 for all major revenue streams, reviewing contracts and analysing the revenue recognised by the Group. No significant impacts to profit or net assets were identified.

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 main impact on the Group of IFRS 16 will be for property that the Group leases for use as office space which is currently classified as operating leases. As a result of the new standard the property leased by the Group will be brought onto the statement of financial position at inception of a lease. At inception the right of use asset will be measured equal to the present value of the lease liability. The present value of the lease liability takes into account prepayments and incentives and will be measured using the interest rate implicit in the lease or the incremental borrowing rate. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability will be recognised separately. The Group is currently assessing the impact of the new standard on the consolidated financial statements. A breakdown of the Group's existing operating lease commitments is provided in Note 44.

IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2021 for the Group)

IFRS 9 will replace 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 represent 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.

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

In September 2016 the IASB issued 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 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. 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 has been reassessed as at 31 December 2017. The Group remains eligible to defer and has opted to defer.

The impact of the implementation of IFRS 9 will be dependent on the implementation of IFRS 17.

IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021)

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.

IFRS 17 will impact the reporting of results arising from insurance contracts and contracts with discretionary participating features issued by entities within the Group's Pensions and Savings, and India and China life segments. The Group has commenced a project which will cover both the implementation of IFRS 17 and IFRS 9. IFRS 17 has not yet been endorsed by the EU.

Other

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
Classification of insurance, reinsurance and investment contracts	Assessment of the significance of insurance risk transferred, and treatment of contracts which have insurance, non-participating investment and participating investment elements	Note 31
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
Consolidation/ significant influence assessment for structured entities	Assessment of control Assessment of significant influence	Basis of consolidation and Note 16
Contingent liabilities	Assessment of whether the Group has a contingent liability in relation to conduct matters	Note 43
Intangible assets	Identification and valuation of intangible assets arising from business combinations Determination of amounts to be recognised as internally developed software	Note 14

During the year to 31 December 2017 we have assessed the identification and valuation of intangible assets arising from business combinations and determination of amounts to be recognised as internally developed software as critical judgements in applying accounting policies. In the year to 31 December 2016 we disclosed these areas as critical accounting estimates however given that they do not result in a significant risk of material adjustment to the carrying value in the next financial year we have considered that they are more akin to an area of 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
Participating contract liabilities, non-participating insurance contract liabilities and reinsurance assets	Determination of the valuation interest rates for annuity liabilities Determination of longevity and mortality assumptions for annuity liabilities	Note 31
Financial instruments at fair value through profit or loss	Determination of the fair value of private equity investments and debt securities categorised as level 3 in the fair value hierarchy	Notes 19 and 41
Investment property	Determination of the fair value of investment property	Notes 17 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 customer relationships and investment management contract intangibles	Note 14
Provisions	Measurement of provision for annuity sales practices	Note 38

In addition to the change to intangible assets discussed above the following changes have been made to critical accounting estimates and assumptions:

·   We have improved the disclosure of the estimate in relation to participating contract liabilities, non-participating insurance contract liabilities and reinsurance assets to inform users that the critical area of estimation uncertainty is in relation to annuity liabilities

·   We have improved the disclosure of the estimate in relation to determination of the recoverable amount in relation to intangible assets to inform users that the critical area of estimation uncertainty relates to customer relationships and investment management contracts

·   We have removed the critical assumptions around determination of expense assumptions in relation to participating contracts, non-participating contracts and reinsurance contracts. We have also removed the critical estimate for over-the-counter derivatives in relation to financial instruments at fair value through profit or loss. These assumptions and estimates have been removed as they are no longer considered to result in a significant risk of material adjustment to carrying value in the next financial year.

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 millions pounds Sterling.

The statements of financial position of Group entities that have a different functional currency than the Group's presentation currency are translated into the presentation currency at the year end exchange rate and their income statements and cash flows are translated at average exchange rates for the year. All resulting exchange differences arising are recognised in other comprehensive income and the foreign currency translation reserve in equity.

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:

	2017	2017	2016	2016
	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	1.145	1.126	1.229	1.171
US Dollar	1.297	1.353	1.356	1.236
Indian Rupee	84.474	86.341	91.058	83.864
Chinese Renminbi	8.753	8.809	8.999	8.587
Hong Kong Dollar	10.104	10.575	10.521	9.580
Singapore Dollar	1.787	1.808	1.876	1.785

(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.

Notes to the Group financial statements

1.     Group structure

(a)     Composition

The following diagram is an extract of the Group structure at 31 December 2017 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 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 plc and Aberdeen, through the acquisition by Standard Life plc 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, following receipt of all necessary approvals, and Standard Life plc was renamed Standard Life Aberdeen plc. The acquisition of Aberdeen accelerates the Group's strategy to create a world-class investment company.

Under the terms of the merger, Aberdeen ordinary shareholders received 0.757 of a share in Standard Life Aberdeen plc on the completion date satisfied through newly issued shares. The merger is accounted for as an acquisition of Aberdeen by Standard Life plc. Aberdeen is reported in the Aberdeen Standard Investments operating segment.

Aberdeen Asset Management PLC is the parent company of the Aberdeen Asset Management Group which is a full-service asset management group focused on meeting the worldwide investment needs of its clients, including institutions, private investors and the advisors who serve them. Aberdeen manages investments across the full spectrum of asset classes and geographic markets, including equities, fixed income, property and alternative assets.

At the acquisition date the consideration and net assets acquired from Aberdeen were as follows:

14 August 2017	Notes	£m
Fair value of equity consideration		4,000
Adjustment for replacement employee share-based payments1		89
Consideration		4,089
7.0% Perpetual cumulative capital notes2		402
5.0% Preference shares		99
Fair value of non-controlling interests		501
Net assets acquired:
Intangible assets	14	865
Property, plant and equipment	18	18
Equity securities and interests in pooled investment funds		1,945
Debt securities		187
Deferred tax assets		35
Receivables and other financial assets		428
Cash and cash equivalents		973
Other assets		24
Total assets		4,475
Non-participating investment contract liabilities3		1,665
Bank overdrafts		478
Other financial liabilities		771
Current tax liabilities		25
Deferred tax liability		124
Pension and other post-retirement benefit provisions		30
Provisions		1
Total liabilities		3,094
Net assets acquired		1,381
Goodwill	14	3,209

¹    On the acquisition date outstanding share awards issued to Aberdeen employees over Aberdeen Asset Management PLC shares were replaced with awards over Standard Life Aberdeen plc shares. The adjustment to consideration reflects the fair value of the pre-acquisition service element of the awards. Refer Note 45 for further details. 

²    On 18 December 2017 perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details.

³    Non-participating investment contract liabilities includes £254m due to other Group entities which eliminates on consolidation.

The fair value of the equity consideration has been calculated by reference to the number of shares issued and the share price at the completion date. The number of shares issued has been adjusted to exclude the shares issued to the Aberdeen Asset Management Employee Benefit Trust 2003 which was included in the acquisition.

The fair value of perpetual cumulative capital notes is based on the listed price. The fair value of preference shares has been calculated using a discounted cash flow model, the significant input for which is comparable transactions used to estimate an appropriate discount rate.

Intangible assets acquired in the business combination consist of customer relationships, brand and technology. Refer Note 14 for further details of these assets and the components of goodwill. None of the goodwill recognised is deductible for income tax purposes.

The amount of revenue and profit contributed to the Group's consolidated income statement for the year ended 31 December 2017 from the acquired business was £492m and £96m respectively. The profit of £96m is after restructuring costs of the acquired business since acquisition and excludes amortisation and impairment of intangible assets acquired through business combinations. If the acquisition had occurred on 1 January 2017 the Group's total revenue and profit for the year would have increased by £1,360m and £248m to £18,340m and £980m respectively.

(c)     Disposals

(c)     HDFC Standard Life Insurance Company Limited

Profit on disposal of interests in associates of £319m includes £302m in relation to the HDFC Standard Life Insurance Company Limited (HDFC Life) initial public offering (IPO).

HDFC Life, the Group's associate Indian life business, announced in July 2017 that its board of directors had approved proceeding with an IPO, with Standard Life (Mauritius Holdings) 2006 Limited (MH06) offering up to 5.43% and HDFC Limited offering up to 9.57% of HDFC Life's equity shares representing, in aggregate, up to 15% of the paid-up equity share capital of HDFC Life.

On 17 November 2017, HDFC Life listed on the National Stock Exchange of India Limited and The Bombay Stock Exchange Limited following completion of the IPO. On opening, the equity shares in HDFC Life were listed at a price of Rs 290 per share. Through the IPO, MH06 sold 108m equity shares in HDFC Life for a total consideration of Rs 31,489m (£359m). MH06's shareholding in HDFC Life now stands at 590m equity shares or 29.3% of the issued equity 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:

Aberdeen Standard Investments

Following the merger with Aberdeen, Standard Life Investments and Aberdeen Asset Management combined under the Aberdeen Standard Investments brand. The combined business is managed and reported as one operating segment. Aberdeen Standard Investments provides a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. Investment management services are also provided by Aberdeen Standard Investments to the Group's other reportable segments. This segment includes the Group's share of the results of HDFC Asset Management Company Limited.

Pensions and Savings

Pensions and Savings provide a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.

India and China life (formerly India and China)

The businesses included in India and China life offer a range of insurance and savings products and comprise our life insurance associate in India, our life insurance joint venture in China, and wholly owned operations in Hong Kong. The assets and liabilities of our wholly owned operations in Hong Kong are classified as held for sale.

(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.

		Aberdeen Standard Investments	Pensions and Savings	India and China life 1	Other 2	Eliminations	Total
31 December 2017	Notes	£m	£m	£m	£m	£m	£m
Fee based revenue		1,260	964	12	-	(125)	2,111
Spread/risk margin		-	165	-	-	-	165
Total adjusted operating income		1,260	1,129	12	-	(125)	2,276
Total adjusted operating expenses		(811)	(769)	(11)	(61)	125	(1,527)
Adjusted operating profit		449	360	1	(61)	-	749
Capital management		2	21	-	(17)	-	6
Share of associates' and joint ventures' profit before tax3		41	-	58	-	-	99
Adjusted profit/(loss) before tax		492	381	59	(78)	-	854
Tax on adjusted profit		(86)	(29)	-	7	-	(108)
Share of associates' and joint ventures' tax expense	10	(29)	-	(12)	-	-	(41)
Adjusted profit/(loss) after tax		377	352	47	(71)	-	705
Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes	12	-	67	-	-	-	67
Restructuring and corporate transaction expenses	9	(58)	(38)	-	(77)	-	(173)
Amortisation and impairment of intangible assets acquired in business combinations4		(117)	(8)	(13)	-	-	(138)
Provision for annuity sales practices	38	-	(100)	-	-	-	(100)
Coupons payable on perpetual notes classified as equity5		10	-	-	-	-	10
Profit on disposal of interests in associates	1	14	-	305	-	-	319
Other		-	(1)	(24)	-	-	(25)
Total adjusting items		(151)	(80)	268	(77)	-	(40)
Tax on adjusting items		25	(2)	-	19	-	42
Profit attributable to non-controlling interests (preference shares and perpetual notes)		(8)	-	-	-	-	(8)
Profit/(loss) for the year attributable to equity holders of Standard Life Aberdeen plc		243	270	315	(129)	-	699
Profit attributable to non-controlling interests
Ordinary shares							25
Preference shares and perpetual notes							8
Profit for the year							732

¹    The India and China segment has been renamed as India and China life.

²    Other primarily includes the corporate centre and related activities.

³    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.

⁴    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.

⁵    On 18 December 2017, perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details.

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 £125m (2016: £112m) included within Aberdeen Standard Investments which relates to investment management fees arising from intra-group transactions with the Pensions and Savings segment. At a Group level an elimination adjustment is required to remove intra-group impacts.

The Group has a widely diversified customer base. There are no customers whose revenue represents greater than 10% of fee based revenue.

 

		Aberdeen Standard Investments restated 1	Pensions and Savings	India and China life 2	Other 3 restated 1	Eliminations	Total restated 1
31 December 2016	Notes	£m	£m	£m	£m	£m	£m
Fee based revenue		885	861	17	-	(112)	1,651
Spread/risk margin		-	134	-	-	-	134
Total adjusted operating income		885	995	17	-	(112)	1,785
Total adjusted operating expenses		(534)	(655)	(22)	(57)	112	(1,156)
Adjusted operating profit/(loss)		351	340	(5)	(57)	-	629
Capital management		-	22	-	(9)	-	13
Share of associates' and joint ventures' profit before tax4		35	-	41	-	-	76
Adjusted profit/(loss) before tax		386	362	36	(66)	-	718
Tax on adjusted profit		(73)	(71)	-	18	-	(126)
Share of associates' and joint ventures' tax expense	10	(11)	-	(2)	-	-	(13)
Adjusted profit/(loss) after tax		302	291	34	(48)	-	579
Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes	12	-	13	-	-	-	13
Restructuring and corporate transaction expenses	9	(23)	(38)	(3)	(3)	-	(67)
Amortisation and impairment of intangible assets acquired in business combinations		(25)	(13)	-	-	-	(38)
Provision for annuity sales practices	38	-	(175)	-	-	-	(175)
Other		(5)	6	-	(3)	-	(2)
Total adjusting items		(53)	(207)	(3)	(6)	-	(269)
Tax on adjusting items		10	46	-	2	-	58
Profit/(loss) for the year attributable to equity holders of Standard Life Aberdeen plc		259	130	31	(52)	-	368
Profit attributable to non-controlling interests
Ordinary shares							51
Preference shares and perpetual notes							-
Profit for the year							419

¹    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the Other segment within Capital management, a £3m increase to the adjusted profit of the Aberdeen Standard Investments segment within operating expenses and a corresponding £5m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.

²    The India and China segment has been renamed as India and China life.

³    Other primarily includes the corporate centre and related activities.

⁴    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.

(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:

	2017		2016
	Income	Expenses	Income restated	Expenses restated
	£m	£m	£m	£m
Total adjusted operating income and adjusted operating expenses as presented in the analysis of Group adjusted profit by segment	2,276	(1,527)	1,785	(1,156)
Insurance and participating investment contract claims and change in liabilities	3,628	(3,628)	7,126	(7,126)
Change in non-participating investment contract liabilities	8,963	(8,963)	8,768	(8,768)
Change in liability for third party interest in consolidated funds	1,124	(1,124)	296	(296)
Other presentation differences	461	(461)	388	(388)
Tax expense attributable to policyholders' returns	166	-	302	-
Adjusting items included in revenue and expenses	331	(358)	-	(269)
Non-controlling interests - ordinary shares and capital management	31	-	64	-
Total revenue and expenses as presented in the consolidated income statement	16,980	(16,061)	18,729	(18,003)

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 revenue by geographical location

Total revenue as presented in the consolidated income statement split by geographical location is as follows:

	2017	2016
	£m	£m
UK	14,317	16,822
Rest of the world	2,663	1,907
Total	16,980	18,729

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

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

	2017	2016
	£m	£m
UK	13,631	9,887
Rest of the world	778	703
Total	14,409	10,590

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

3.     Business written in the Group's insurance entities

(a)     How the business is held in the Group's insurance entities

The Group's insurance and investment contracts are held by the regulated entities within each reportable segment. Each regulated entity operates various funds and how the business is held within these funds is outlined below by reportable segment.

(a)(i)    Pensions and Savings

Standard Life Assurance Limited

The main entity in the Pensions and Savings reportable segment that issues insurance and investment contracts is Standard Life Assurance Limited (SLAL). SLAL operates a fund structure which was established on the demutualisation of The Standard Life Assurance Company on 10 July 2006, under which its recognised assets and liabilities are allocated to one of the following funds:

·  Shareholder Fund (SHF)

·  Proprietary Business Fund (PBF) - includes UK, Germany and Ireland branches

·  Heritage With Profits Fund (HWPF) - includes UK, Germany and Ireland branches     

·  German With Profits Fund (GWPF)

·  German Smoothed Managed With Profits Fund (GSMWPF)

·  UK Smoothed Managed With Profits Fund (UKSMWPF)

SLAL - Insurance and investment contracts issued since demutualisation

The liabilities and associated supporting assets for contracts issued since demutualisation are held in the PBF except for the element of any contract where the customer has chosen to invest in a with profits (i.e. participating) fund. The assets and associated liabilities, including liabilities for financial guarantees, for such with profits investment elements are held in the GWPF, GSMWPF or UKSMWPF. The PBF is sub-divided into internal linked funds (unit linked funds) and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and corresponding liabilities for such unit linked investment elements are held in the unit linked funds. Asset management charges are transferred from the unit linked funds to the non-unit linked sub-fund of the PBF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit linked investment element are held in the non-unit linked sub-fund of the PBF. Any liabilities for insurance features contained within a contract that has a with profits element are held in the non-unit linked sub-fund of the PBF. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element or a with profits investment element are held in the non-unit linked sub-fund of the PBF.

SLAL - Insurance and investment contracts issued before demutualisation

The liabilities and associated supporting assets for contracts, both participating and non-participating, issued prior to demutualisation are mostly held in the HWPF except for (i) the assets and corresponding liabilities for unit linked investment elements of such contracts, and (ii) the supporting assets and associated liabilities for longevity risk and investment risk on certain annuity contracts. The assets and associated liabilities for these two contract components are held in the PBF. Asset management charges arising on unit linked investment elements are transferred from the PBF to the HWPF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit linked investment element or a with profits investment element are held in the HWPF. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element or a with profits investment element are also held in the HWPF.

Under the Scheme of Demutualisation (the Scheme) the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the board of SLAL is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. The Scheme provides that certain defined cash flows (recourse cash flows (RCF)) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the SHF, and thus accrue to the ultimate benefit of equity holders of the Company. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of Germany branch business. Under these mechanisms, profits, on an RCF basis, on non-participating business excluding investment spread profits on annuities and profits, on an RCF basis or German additional expenses basis, on unitised with profits contracts, are transferred to the SHF. All investment return on HWPF investments is retained in the HWPF for the ultimate benefit of participating policyholders. Under the Scheme, transfers to the SHF are subject to certain constraints in order to protect policyholders.

Standard Life International Designated Activity Company

The Pensions and Savings reportable segment also contains the International Bond issued by Standard Life International Designated Activity Company (SL Intl) to UK residents. SL Intl operates using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element are held in the non-unit linked fund.

(a)(ii)   India and China life

The entity in the India and China life reportable segment that issues insurance and investment contracts, other than associates and joint ventures, is Standard Life (Asia) Limited (SL Asia) which is a Hong Kong entity. SL Asia operates using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. The assets and liabilities of SL Asia have been classified as held for sale during the year. Refer Note 24 for further details.

(a) (iii)              Aberdeen Standard Investments

The entity in the Aberdeen Standard Investments operating segment that issues investment contracts is Aberdeen Asset Management Life and Pensions Limited (Aberdeen Life), which is a UK entity. The company serves as a delivery mechanism for investment services to the Aberdeen group's institutional pension scheme clients and other insurance entities through the issue of Trustee Investment Plans and the reassurance of unit linked liabilities. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds.

(b)     Insurance, investment and reinsurance contract terms including guarantees and options

Details of the significant types of insurance and investment contracts issued by the Group, the nature of any guarantees and options provided under these contracts and details of significant reinsurance contracts are given below. The accounting policy for the classification of contracts is set out in Note 31.

(b)(i)    Pensions and Savings - Insurance and investment contracts issued since demutualisation

UK annuity-in-payment contracts (spread/risk business)

This class of business consists of single premium contracts that provide guaranteed annuity payments. The payments depend on the survival of a life or lives with or without a guaranteed period and may reduce on a specified death or increase each year at a predefined rate or based on the movement in UK RPI. These contracts are classified as non-participating insurance contracts.

The total liability at 31 December 2017 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £457m (2016: £445m) and this represents approximately 10% (2016: 10%) of the total liability for UK annuity in payment contracts held within the PBF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall. If the market moves in line with the adverse scenarios as shown in the market risk sensitivity analysis in Note 39(b), then the impact on shareholder equity from these RPI linked annuities and corresponding assets is not significant.

For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2017 is £458m (2016: £432m) and this represents approximately 10% (2016: 10%) of the total liability for UK annuity in payment contracts held in the PBF. If the market moves in line with the adverse market conditions as shown in the market risk sensitivity analysis, the impact on shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.

UK and Ireland unit linked pension contracts (fee business)

This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts.

The major unit linked pension contracts include UK Active Money Self Invested Personal Pensions (SIPP), UK Active Money Personal Pensions, UK Stakeholder, Irish Synergy Personal Pensions, UK Group SIPPs, UK Group Flexible Retirement Plans, UK Group Stakeholder and Trustee Investment Plans. These contracts do not contain a with profits investment option except for UK Group Stakeholder and UK Stakeholder, under which customers may invest in the UKSMWPF.

The costs of contracts invested in unit linked funds are recovered by deduction of an asset management charge from the unit linked funds. Under Stakeholder contracts, this asset management charge has a specified maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

Under UK SIPP contracts, as well as investing in unit linked funds offered by SLAL, policyholders can choose to invest in a wide range of other permitted investments. These other investments are not recognised on the Group's consolidated statement of financial position.

UK unit linked investment bonds (fee business)

Unit linked investment bonds issued by SLAL (e.g. Capital Investment Bond) are single premium whole of life contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

The International Bond is issued by SL Intl to UK residents. It is a single premium whole of life investment bond. The customer has the option to invest in unit linked funds offered by SL Intl and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the last life assured an additional benefit of 0.1% of the surrender value is paid unless the death is accidental when an additional benefit of 10% of the surrender value is paid subject to a £1m cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.

Germany unit linked deferred annuity contracts (fee business)

This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts provide a return of premiums guarantee on death and the option to take up an annuity on guaranteed terms. They are classified as non-participating insurance contracts. These contracts do not contain a with profits investment option.

Germany unitised with profits deferred annuity contracts (fee business)

Germany unitised with profits deferred annuity contracts were written in the PBF with the participating investment elements being transferred to the GWPF and, to a significantly lesser extent, to the GSMWPF. These contracts were closed to new business in 2015. The death benefit under all of the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value, and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.

The maturity value of contracts invested in the GWPF is subject to guaranteed minimum amounts. In addition, certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors and certain unit prices in the GWPF are guaranteed not to decrease.

The GWPF is operated such that all investment return on assets held in the fund will be distributed to participating policyholders over time subject to deductions of asset management charges and deductions for guarantees.

(b)(ii)   Pensions and Savings - Insurance and investment contracts issued before demutualisation and related reinsurance contracts

HWPF participating contract allocations of regular and final bonuses

This section firstly describes the method used by the Group to determine the regular and final bonuses allocated to participating contracts held in the HWPF. It then describes the significant types of insurance and investment contracts held in that fund, the nature of any guarantees provided and significant reinsurance contracts.

As shown in the market risk sensitivity analysis in Note 39(b), there is no impact on shareholder equity arising from contracts in the HWPF for either of the market movements scenarios. As explained in the limitations of the sensitivity analysis, this is because although shareholders are potentially exposed to the full cost if the assets of the HWPF are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.

Regular bonuses are declared at the discretion of the Group in accordance with the Principles and Practices of Financial Management (PPFM) of the HWPF for UK business and similar principles for European business and are set at levels which aim to achieve a gradual build-up in guaranteed participating policy benefits whilst not unduly constraining investment freedom and the prospects for final bonuses. In setting these rates, the financial position (both current and projected) of the HWPF is taken into account, and were it necessary, regular bonus rates would be set to zero. Regular bonus rates are set for each relevant class of participating policy and/or internal fund and reflect its characteristics, including any guarantees. For some contracts, final bonuses may also be paid. These bonuses are not guaranteed and can be withdrawn at any time.

The Group's aim is that, subject to meeting all contractual obligations and maintaining an adequate financial position, payouts on a participating policy (including any final bonus applying) should fairly reflect the experience of the HWPF applicable to such a policy, after any adjustments for smoothing, and any distribution of the residual estate deemed appropriate by the Group.

When setting payout levels, the Group seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain. 

Asset shares are used as a tool to determine fair treatment. The calculation of asset shares varies between products, for example calculations can be on the basis of representative policies or on an individual policy basis.

The methodology and parameters used in payout calculations may, of necessity, involve some measure of approximation. The Group reviews regularly the methodology and parameters used and sets parameters on bases appropriate for the participating class and/or internal fund concerned.

In normal circumstances the Group seeks to offer some smoothing of investment returns to participating policyholders at the time of claims due to maturity for life policies or for pension policies where the Group has no right to reduce benefits as defined in the relevant contractual terms and conditions. The Group may, at its discretion, also provide some smoothing of investment returns for death claims and some types of withdrawal at the time of payment. The Group aims to operate smoothing of investment returns in such a way as to be neutral for participating policyholders as a whole over time. The Group monitors the anticipated cost of smoothing on a regular basis and, in most circumstances, will reflect the costs in payouts and in some circumstances adjust the approach to smoothing.

When calculating asset shares, the Group may, at its discretion, make fair deductions to reflect its assessment of the cost of guarantees. The Group takes an allowance for the assessed costs of guarantees when determining final bonuses payable on claims, calculating policy switch values and calculating surrender and transfer values. These allowances vary between types of policies, reflecting the nature of the guarantees provided. These allowances are kept under review. A deduction is also taken from participating asset shares determined on an expense basis of 0.5% pa as a contribution to the capital of the HWPF.

Eligible policies covered by the Mortgage Endowment Promise may receive 'top up' amounts, in accordance with the Scheme.

UK conventional with profits contracts (no impact on equity holder profits in the absence of burnthrough)

Conventional (i.e. non-unitised) with profits contracts consist of single or regular premium endowment, whole life and pension contracts held in the HWPF.

Under endowment and whole life contracts, guaranteed benefits are payable on death. Regular bonuses may be added to the guaranteed sum assured over the term of the policy and, in addition, a final bonus may be paid on death and maturity. Certain endowment assurances have minimum surrender value provisions and minimum paid-up values.

Under pension contracts, a minimum level of benefit is set at the outset and applies at the date(s) specified in the policy, for example under pure endowment contracts. Regular bonuses may be added to this initial minimum over the term of the policy and, in addition, a final bonus may be paid. Guaranteed annuity options providing for payment of a minimum annuity, in lieu of a cash sum, are available under pure endowment contracts. Under some of these contracts the guarantee applies only at the maturity date. Under other contracts, the option also applies for a specified period preceding the maturity date, in which case the sum assured and bonuses are reduced by specified factors and different guaranteed annuity rates apply.

All conventional with profits contracts are classified as participating insurance contracts.

UK and Ireland unitised with profits pension contracts (fee business via RCF)

This class of business comprises single or regular premium contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. Such contracts include hybrid contracts (see Note 31) resulting in the unitised with profits investment elements being classified as participating investment contracts, although there are some contracts that are classified as participating insurance contracts, for example those with guaranteed minimum pensions. The major unitised with profits pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.

The significant options and guarantees under these contracts are the following:

·   Contracts where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per year or that the unit price will not fall and that there will be no unit price adjustment (UPA) at specified retirement dates or death

·   Certain Trustee Investment Plan contracts where, subject to specified conditions and limits, it is guaranteed that there will be no unit price adjustment (UPA) when units are encashed

UK and Ireland unitised with profits life contracts (fee business via RCF)

Unitised with profits life business comprises single or regular premium endowment and whole life contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. The death benefit under regular premium contracts is the greater of the bid value of units allocated and sum assured under the contract. Some contracts also contain critical illness cover providing for payment of a critical illness sum assured on diagnosis of certain defined serious illnesses. These contracts, principally Homeplan, With Profits Bonds and Versatile Investment Plans, are classified as participating insurance contracts.

The significant options and guarantees under these contracts are the following:

·   Contracts where, subject to specified conditions, it is guaranteed on death or maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity

·   For bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits

Under contracts effected in connection with house purchase, the death benefit is guaranteed. Under other regular premium contracts, at any time after the first 10 years, the Group may review the status of the contract and, if it deems it necessary, the sum assured may be reduced, within the limits permitted.

Under some contracts effected in connection with house purchase, provided the original contract is still in-force, the following options can normally be exercised at any time before the 55th birthday of the life assured:

·   Future insurability option under which a new contract can be effected on then current premium rates, in connection with a further loan, up to the level of life and basic critical illness cover available on the original contract, without any further evidence of health

·   Term extension option on then current premium rates under which the term of the contract may be extended by a whole number of years if the lender agrees to extend the term of the loan

Germany unitised with profits contracts (fee business via German additional expenses basis)

Unitised with profits Germany contracts held in the HWPF mainly consist of endowment assurances and deferred annuities, under which a percentage of the premium is allocated to units on a participating basis. The death benefit under endowment assurances is the greater of the sum assured on death or 105% of the current surrender value. The death benefit under deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.

The maturity value, and for certain contracts the surrender benefits, are subject to guaranteed minimum amounts. For some participating unitised policies it is guaranteed that there will be no UPA on claims on or after the surrender option date. Certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors. In addition certain unit prices in the HWPF are guaranteed not to decrease.

UK and Ireland unit linked pension contracts (fee business via RCF)

This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds held in the PBF. Such contracts include hybrid contracts (see Note 31) resulting in the unit linked investment elements being classified as non-participating investment contracts. The major unit linked pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.

The costs of contracts invested in unit linked funds are recovered by deduction of asset management charges from the unit linked funds which are transferred from the PBF to the HWPF. Under Stakeholder contracts, this asset management charge has a maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

UK and Ireland unit linked life contracts (fee business via RCF)

This class of business comprises principally unit linked investment bonds (e.g. Capital Investment Bonds), classified as non-participating investment contracts and the unit linked investment element of Homeplan contracts, classified as non-participating insurance contracts. No significant guarantees, other than the guaranteed death benefit on Homeplan contracts, are provided under these contracts.

The costs of contracts invested in unit linked funds are recovered by deduction of asset management charges from the unit linked funds which are transferred from the PBF to the HWPF.

UK and Ireland annuity-in-payment contracts (spread/risk business in relation to longevity risk transferred to the PBF otherwise no impact on shareholder profits in absence of burnthrough)

This class of business consists of the same type of contracts described in (b)(i) and also includes the With Profit Pension Annuity (WPPA), under which changes to the level of annuity are based on a declared rate of return but reductions in the level of the annuity are limited. These contracts are classified as non-participating insurance contracts, except for the WPPA which is classified as a participating insurance contract.

SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF. In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium (referred to as 'the deposit'). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 39(c) on credit exposure and Note 31(c) for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer. The reinsurance asset recognised in relation to this arrangement is £4,645m (2016: £5,190m).

The longevity risk on certain non-participating annuity-in-payment contracts held in the HWPF has been transferred to the PBF. The market risk on certain annuities has been transferred to the PBF.

For those annuities in payment which increase at a predefined rate the total liability at 31 December 2017 is £2,755m (2016: £2,951m) and this represents approximately 33% (2016: 32%) of the total liability for UK annuity in payments contracts held within the HWPF.

The total liability at 31 December 2017 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,806m (2016: £1,983m) and this represents approximately 22% (2016: 22%) of the total liability for UK annuity contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.

UK other non-participating contracts (spread/risk business via RCF)

This class of business consists primarily of deferred annuities that provide guaranteed annuity payments from the retirement age associated with the relevant pension plan. The payments depend on the survival of a life or lives with or without a guarantee period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in UK RPI. These contracts are classified as non-participating insurance contracts.

(b)(iii) India and China life - Insurance and investment contracts

Unit linked life contracts (fee business)

The main contract issued by SL Asia is the Harvest 101 product. This contract was closed to new business in 2015. It is a regular premium savings product with a term ranging from 5 to 25 years. The customer has the option to invest in unit linked funds offered by SL Asia and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the initial account value is paid subject to a USD10,000 cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.

(b)(iv) Aberdeen Standard Investments - investment contracts

Unit linked contracts and reinsurance contracts (fee business)

This class of business consists of unit linked investment contracts to trustees of UK pension schemes and reinsurance contracts to insurance companies covering unit linked pension liabilities. There are no investment guarantees on the contracts. The benefits payable are linked solely to the performance of the internal linked funds. These contracts are classified as non-participating investment contracts.

4.     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.

 

		2017	2016
	Notes	£m	£m
Interest and similar income
Cash and cash equivalents		55	86
Available-for-sale debt securities		10	12
Loans		5	6
		70	104
Dividend income		2,080	1,999
Gains/(losses) on financial instruments at fair value through profit or loss
Equity securities and interests in pooled investment funds (other than dividend income)1		8,833	9,788
Debt securities		1,218	7,169
Derivative financial instruments		(339)	(3,857)
		9,712	13,100
Foreign exchange losses on financial instruments other than those at fair value through profit or loss		(81)	(80)
Income from investment property
Rental income	17	508	555
Net fair value gains/(losses) on investment property	17	485	(302)
		993	253
Investment return		12,774	15,376

¹    Presentation changed and comparative restated. Refer Note 16(c).

5.     Fee income

Fee income from investment contracts, fund platforms and third party funds under management relates to the provision of investment management and administration services, and is recognised as services are provided and it is almost certain that the fee income will be received. Where fee income 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).

		2017	2016
	Notes	£m	£m
Fee income from investment contracts and fund platforms		721	649
Fee income from third party funds under management		891	466
Fee income deferred during the year	36	(11)	(15)
Amortisation of deferred income	36	52	61
Other fee income		33	25
Total fee income		1,686	1,186

6.     Other administrative expenses

		2017	2016
	Notes	£m	£m
Interest expense		6	5
Commission expenses		195	153
Staff costs and other employee-related costs	7	781	596
Operating lease rentals		44	34
Auditors' remuneration	8	8	6
Depreciation of property, plant and equipment	18	15	14
Impairment losses (reversed)/recognised on property, plant and equipment	18	(4)	1
Amortisation of intangible assets	14	124	64
Impairment losses on intangible assets	14	77	20
Impairment losses on disposal group classified as held for sale	24	24	-
Other		682	556
		1,952	1,449
Acquisition costs deferred during the year	15	(49)	(51)
Amortisation of deferred acquisition costs	15	79	96
Total other administrative expenses		1,982	1,494

In addition to interest expense of £6m (2016: £5m), interest expense of £88m (2016: £82m) was incurred in respect of subordinated liabilities and £21m (2016: £31m) in respect of deposits from reinsurers. For the year ended 31 December 2017, total interest expense is £115m (2016: £118m).

7.     Staff costs and other employee-related costs

		2017	2016
	Notes	£m	£m
The aggregate remuneration payable in respect of employees:
Wages and salaries		633	489
Social security costs		75	56
Pension costs	35
Defined benefit plans		(22)	(14)
Defined contribution plans		57	33
Employee share-based payments and deferred fund awards	45	38	32
Total staff costs and other employee-related costs		781	596

 

	2017	2016
The average number of staff employed by the Group during the year:
Aberdeen Standard Investments1	2,860	1,681
Pensions and Savings	4,315	4,026
India and China life2	82	112
Other3	511	483
Total average number of staff employed	7,768	6,302

¹    Previously Standard Life Investments. Refer Note 2 for further details. Includes staff employed by Aberdeen from the acquisition date to 31 December 2017.

²    India and China has been renamed as India and China life.

³    Includes staff in group corporate centre and group information technology. 

Information in respect of Directors' remuneration is provided in the Directors' remuneration report on pages 94 to 134.

8.     Auditors' remuneration

During the financial year ended 31 December 2017, the Group appointed KPMG LLP (KPMG) as principal auditor replacing PricewaterhouseCoopers LLP (PwC). Accordingly the following table relates to KPMG for 2017 and PwC for 2016:

	2017	2016 restated
	£m	£m
Fees payable to the Company's auditors for the audit of the Company's individual and consolidated financial statements	0.9	0.3
Fees payable to the Company's auditors for other services
The audit of the Company's consolidated subsidiaries pursuant to legislation	4.8	3.8
Audit related assurance services	1.9	0.8
Total audit and audit related assurance fees	7.6	4.9
Other assurance services	0.3	0.5
Tax compliance services	-	0.4
Tax advisory services	-	0.2
Other non-audit fee services	0.1	0.3
Total non-audit fees	0.4	1.4
Total auditors' remuneration	8.0	6.3

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. These were previously included in auditors remuneration and the 2016 comparatives have therefore been restated.

During the year ended 31 December 2017 no audit fees were payable in respect of defined benefit plans to the Group's principal auditor (2016: £71,000 payable to PwC).

For more information on non-audit services, refer to the Audit Committee report in Section 4 - Corporate governance statement.

9.     Restructuring and corporate transaction expenses

Total restructuring and corporate transaction expenses incurred during the year were £176m (2016: £62m). The expenses mainly relate to the merger with and integration of Aberdeen including deal costs of £38m and stamp duty of £21m, Ignis integration, Elevate integration and a number of other business unit restructuring programmes. In addition to corporate transaction expenses recognised in the consolidated income statement £4m (2016: £nil) was recognised directly in the merger reserve in equity in relation to the Aberdeen merger.

The table below reconciles restructuring and corporate transaction expenses in the consolidated income statement with restructuring and corporate transaction expenses used to determine adjusted profit before tax.

		2017	2016
		£m	£m
Restructuring and corporate transaction expenses		176	62
Pension plan restructuring		-	5
Expenses incurred by the Heritage With Profit Fund		(3)	-
Restructuring and corporate transaction expenses used to determine adjusted profit before tax		173	67

In December 2014, the Group announced that the UK staff defined benefit pension plan would be closed to future accrual. On 16 April 2016, all employees in the closing plan were transferred to the UK defined contribution plan for future service and employer contributions into the defined contribution plan were amended. Following this restructuring of the pension plans, adjusted profit before tax for the year ended 31 December 2016 was increased by £5m so that adjusted profit before tax reflected the expected long-term pension expense for the period and was therefore more indicative of the long-term operating performance of the Group. As a result for year ended 31 December 2016, £5m of pension costs that were included in staff costs in the consolidated income statement, were included in restructuring and corporate transaction expenses in determining adjusted profit before tax.

10.   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.

The Group provides additional disclosure in relation to the total tax expense. Certain products are subject to tax on policyholders' investment returns. This tax, 'policyholder tax', is accounted for as an element of current and deferred 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 year plus the movement of amounts expected to be payable in future years by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders' profit.

(a)     Tax charge in the consolidated income statement

(a)(i)  Current year tax expense

		2017	2016
		£m	£m
Current tax:
UK		214	316
Double tax relief		(2)	(3)
Overseas		27	23
Adjustment to tax expense in respect of prior years		4	(3)
Total current tax		243	333
Deferred tax:
Deferred tax (credit)/expense arising from the current year		(11)	37
Total deferred tax		(11)	37
Total tax expense		232	370
Attributable to policyholders' investment return		166	302
Attributable to equity holders' profits		66	68
Total tax expense		232	370

The share of associates' and joint ventures' tax expense is £41m (2016: £13m) and is included in profit before tax in the consolidated income statement in 'Share of profit from associates and joint ventures'.

In 2017 unrecognised tax losses from previous years were used to reduce the current tax expense by £3m (2016: £2m). Unrecognised tax losses and timing differences were used to reduce the deferred tax expense by £3m (2016: £7m).

Current tax recoverable and current tax liabilities at 31 December 2017 were £192m (2016: £166m) and £166m (2016: £113m) respectively. Current tax assets and liabilities at 31 December 2017 and 31 December 2016 are expected to be recoverable or payable in less than 12 months.

Certain Group entities are party to claims and proceedings to recover tax suffered in respect of overseas income. These claims and proceedings predominantly relate to assets in policyholder funds, primarily SLAL's HWPF. There is significant uncertainty on the outcome of these claims and they are not expected to materially impact profit for the year attributable to equity holders or total equity. No amounts have been recognised at 31 December 2017 or 31 December 2016 in respect of these claims and proceedings.

(a)(ii)   Reconciliation of tax expense

		2017	2016
		£m	£m
Profit before tax		964	789
Tax at 19.25% (2016: 20%)		186	158
Policyholder tax (net of tax at UK standard rate)		134	241
Permanent differences		(49)	2
Tax effect of accounting for non-controlling interests		(5)	(10)
Tax effect of accounting for share of profit from associates and joint ventures		(8)	(13)
Different tax rates		(18)	(5)
Adjustment to current tax expense in respect of prior years		4	(3)
Recognition of previously unrecognised tax credit		(6)	(9)
Deferred tax not recognised		6	-
Adjustment to deferred tax expense in respect of prior years		(35)	(2)
Write down of deferred tax asset		25	11
Other		(2)	-
Total tax expense for the year		232	370

The standard UK corporation tax rate for the accounting period is 19.25%. The UK corporation tax rate was reduced to 19% from 1 April 2017 and will reduce to 17% from 1 April 2020. These changes have been taken into account in the calculation of the UK deferred tax balance at 31 December 2017.

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:

·   The tax expense for the year includes policyholder tax, as described in the accounting policy above. Profit before tax includes an equivalent amount of income in relation to this policyholder tax and this therefore gives rise to a reconciling item.

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

Details of other significant reconciling items are as follows:

·   Permanent differences include non-taxable gains arising from the IPO of HDFC Life, a tax deductible donation made to Standard Life Foundation (with no corresponding tax charge on receipt by Standard Life Foundation which is a subsidiary undertaking of the Group) offset partially by expenses relating to the merger with Aberdeen which were not tax deductible. These items are expected to be non-recurring.

·   Different tax rates will vary according to the level of profit subject to tax at rates different from UK standard rate (e.g. overseas profit and profit arising in consolidated investment funds)

·   The ability to value losses and other tax assets will also affect the actual tax charge. The write down of deferred tax asset of £25m relates to a reduction in the valuation of the German tax reserves primarily due to the expected impact of Brexit restructuring and adjustments to our transfer pricing methodology. The adjustment to deferred tax expense in respect of prior years of £35m relates mainly to a change in the valuation of German temporary differences due to the changed economics of that business leading to adjustments to our transfer pricing methodology. All these items are expected to be non-recurring.

(b)     Tax relating to components of other comprehensive income

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

		2017	2016
		£m	£m
Tax relating to defined benefit pension plan deficits		10	(2)
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss		10	(2)
Current tax on net change in financial assets designated as available-for-sale		-	3
Tax relating to fair value losses recognised on cash flow hedges		(5)	-
Tax relating to cash flow hedge losses transferred to consolidated income statement		2	-
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss		(3)	3
Tax relating to other comprehensive income		7	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

		2017	2016
	Notes	£m	£m
Tax relating to expiry of unclaimed asset trust claim period		-	7
Tax credit on reserves for employee share-based payments	29	(1)	-
Tax credit relating to coupons payable on perpetual notes classified as equity		(2)	-
Tax relating to items taken directly to equity		(3)	7

(d)     Deferred tax assets and liabilities

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

		2017	2016
		£m	£m
At 1 January		(217)	(170)
Acquired through business combinations		(89)	(2)
Amounts credited/(charged) to the consolidated income statement		11	(37)
Amounts credited directly to equity in respect of employee share-based payments		1	-
Transfer to current tax for vested employee share-based payments		-	(3)
Tax on defined benefit pension plan deficits		(10)	-
Tax on cash flow hedge		3	-
Foreign exchange adjustment		(1)	(4)
Other		-	(1)
Net deferred tax liability at 31 December		(302)	(217)

(d)(ii)   Analysis of recognised deferred tax

		2017	2016
		£m	£m
Deferred tax assets comprise:
Actuarial liabilities		5	-
Losses carried forward		11	12
Depreciable assets		12	42
Deferred income		8	12
Employee benefits		37	26
Provisions and other temporary timing differences		2	14
Insurance related items		5	5
Other		4	-
Gross deferred tax assets		84	111
Less: Offset against deferred tax liabilities		(19)	(69)
Deferred tax assets		65	42
Deferred tax liabilities comprise:
Insurance related items		4	5
Unrealised gains on investments		196	187
Deferred acquisition costs		53	104
Temporary timing differences		-	1
Deferred tax on intangible assets acquired through business combinations		130	25
Other		3	6
Gross deferred tax liabilities		386	328
Less: Offset against deferred tax assets		(19)	(69)
Deferred tax liabilities		367	259
Net deferred tax liability at 31 December		(302)	(217)

A deferred tax asset of £11m (2016: £12m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investments. 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. The losses do not have an expiry date.

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 £90m in the UK and £293m overseas (2016: £52m, £113m respectively)

·   Tax reserves of the German branch of Standard Life Assurance Limited of £102m (2016: £20m)

·   Unrealised investment losses of £nil (2016: £12m)

·   Loss relating to Irish pension scheme deficit £42m (2016: deferred tax asset was recognised)

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 29.8p (2016: 18.7p) and diluted earnings per share was 29.6p (2016: 18.6p) for the year ended 31 December 2017. The following table shows details of basic, diluted and adjusted earnings per share.

	2017	2016 restated1
	£m	£m
Adjusted profit before tax	854	718
Tax on adjusted profit	(108)	(126)
Share of associates' and joint ventures' tax expense	(41)	(13)
Adjusted profit after tax	705	579
Adjusting items	(40)	(269)
Tax credit attributable to adjusting items	42	58
Adjustment for coupons payable on perpetual notes classified as equity net of tax	(8)	-
Profit attributable to equity holders of the Company	699	368
	Millions	Millions
Weighted average number of ordinary shares outstanding	2,343	1,972
Dilutive effect of share options and awards	17	6
Weighted average number of diluted ordinary shares outstanding	2,360	1,978
	Pence	Pence
Basic earnings per share	29.8	18.7
Diluted earnings per share	29.6	18.6
Adjusted earnings per share	30.1	29.4
Adjusted diluted earnings per share	29.9	29.3

¹    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the other segment, a £3m increase to the Aberdeen Standard Investments segment and a corresponding £5m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.

Details of share options and awards which have a dilutive effect are provided in Note 45.

12.   Adjusted profit and adjusting items

Adjusted profit before tax (previously named operating profit before tax) is the Group's key alternative performance measure. Adjusted profit excludes impacts arising from 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.

Adjusted profit also 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

·   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

Coupons payable on perpetual notes classified as non-controlling interests are included in adjusted profit before tax. For IFRS purposes, these are recognised directly in equity. Prior to these instruments being reclassified as a subordinated liability on 18 December 2017, this gave rise to an adjusting item relating to 'coupons payable on perpetual notes classified as equity'. Dividends payable on preference shares classified as non-controlling interests are excluded from adjusted profit in line with the treatment of ordinary dividends.

Following completion of the merger the Group has changed the calculation of adjusted profit. Short term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to holding companies and other non-insurance entities. The 2016 comparatives have been restated to reflect this change. The reason for the change is to align the approach with that used by Aberdeen in their key profit alternative performance measure; and to make the measure more relevant as it is more consistent with other asset management peers.

(a)     Short-term fluctuations in investment return and economic assumptions changes - insurance entities

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% (2016: 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% (2016: 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 2017 or 31 December 2016. If these were to arise they would be excluded from adjusted profit.

Gains and losses on foreign exchange are deemed to represent short-term fluctuations in investment return and economic assumption changes and thus are excluded from adjusted profit.

Short-term fluctuations in investment return for the year ended 31 December 2017 and 31 December 2016 relate principally to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities.

(b)     Other

In the reconciliation of consolidated adjusted profit before tax to profit for the year the Other adjusting item sub-total includes £24m (2016: £nil) in relation to the impairment of a disposal group classified as held for sale and £nil (2016: £5m) net fair value movements in contingent consideration.

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.

	2017		2016
	Pence per share	£m 1	Pence per share	£m
Prior year's final dividend paid	13.35	263	12.34	243
Interim dividend paid	7.00	206	6.47	127
Total dividends paid on ordinary shares		469		370
Current year final recommended dividend	14.30	421	13.35	262

¹    Estimated for current year final recommended dividend.

The final recommended dividend will be paid on 30 May 2018 to shareholders on the Company's register as at 20 April 2018, subject to approval at the 2018 Annual General Meeting. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2017 is 21.30p (2016: 19.82p).

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.

The Group also 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.

 

 

			Acquired through business combinations
		Goodwill	Brand	Customer relationships and investment management contracts	Technology	Internally developed software 1	Purchased software and other	Total
	Notes	£m	£m	£m	£m	£m	£m	£m
Gross amount
At 1 January 2016		219	-	240	30	287	66	842
Additions		14	-	14	-	61	-	89
Disposals and adjustments		-	-	-	-	(6)	-	(6)
Other		-	-	-	-	3	-	3
At 31 December 2016		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	77	5,071
Accumulated amortisation and impairment
At 1 January 2016		-	-	(75)	(26)	(144)	(31)	(276)
Amortisation charge for the year		-	-	(16)	(3)	(37)	(8)	(64)
Impairment losses recognised		(10)	-	(9)	-	(1)	-	(20)
Disposals and adjustments		-	-	-	-	6	-	6
Other		-	-	-	-	(2)	-	(2)
At 31 December 2016		(10)	-	(100)	(29)	(178)	(39)	(356)
Amortisation charge for the year	6	-	(7)	(68)	(5)	(37)	(7)	(124)
Impairment losses recognised	6	(5)	-	(40)	-	(32)	-	(77)
Disposals and adjustments		-	-	-	-	1	-	1
Other		-	-	-	-	(1)	-	(1)
At 31 December 2017		(15)	(7)	(208)	(34)	(247)	(46)	(557)
Carrying amount
At 1 January 2016		219	-	165	4	143	35	566
At 31 December 2016		223	-	154	1	167	27	572
At 31 December 2017		3,427	86	774	40	156	31	4,514

¹    Included in the internally developed software of £156m (2016: £167m) is £53m (2016: £56m) relating to intangible assets not yet ready for use.

Goodwill

The additions to goodwill and intangible assets acquired through business combinations during the year to 31 December 2017 relate solely to the acquisition of Aberdeen discussed in Note 1. Of the Group's goodwill of £3,427m (2016: £223m) at 31 December 2017, £3,354m (2016: £145m) is attributed to the Aberdeen Standard Investments group of cash-generating units. The remaining goodwill of £73m (2016: £78m) is attributable to a number of smaller cash-generating units in the Pensions and Savings segment.

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 as one operating 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 is 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 are included in the valuation of the intangible assets discussed below, with additional synergies forming part of goodwill.

Other intangible assets arising on the Aberdeen acquisition

Identification and valuation of intangible assets acquired in business combinations is a key judgement. On the acquisition of Aberdeen, we identified intangible assets in relation to customer relationships, brand and technology as being separable from goodwill.

Customer relationships

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

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 is that the value associated with the open ended fund assets under management is 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 is 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	26
Open ended funds	Separate vehicle group - open ended investment vehicles.	11 years	223	209
Segregated and similar	All other vehicle groups dominated by segregated mandates which represent 75% of this group.	12 years	427	402

Once identified, measuring the fair value of intangible assets acquired in business combinations requires further assumptions and judgements. Customer relationships are 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 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.

Customer relationships and investment management contracts intangible assets also include £101m (2016: £114m) acquired through the acquisition of Ignis, comprising life company customer relationships/contracts, institutional client investment management contracts and retail client investment management contracts.

Estimates and assumptions

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

·   Determination of useful lives

·   Determination of the recoverable amount in relation to impairment assessment of customer intangibles

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

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.

Goodwill is assessed for impairment at each reporting date. For other intangible assets an assessment is made as to whether there is an indication that the intangible asset has become impaired. If any indication of impairment exists and the carrying value of an intangible asset exceeds its recoverable amount then the carrying value is written down to the recoverable amount.

The recoverable amount for intangible assets excluding goodwill is currently its 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 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 impairment of internally generated software recognised during the year includes £31m (2016: £nil) relating to discontinuation of part of an IT transformation project in the Pensions and Savings segment.

In February 2018 Lloyds Banking Group (LBG) and Scottish Widows informed the Group that Scottish Widows and LBG's Wealth business intend 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 relates to this announcement and is an impairment of the Lloyds Banking Group customer relationship intangible asset in the Aberdeen Standard Investments segment.  The recoverable amount of this asset, which is its value in use, at 31 December 2017 is £26m and was calculated using a pre-tax discount rate of 13%. The other key assumptions used to measure the value in use calculation are consistent with those used in the acquisition date valuation set out on page 179 other than the useful live which has been reassessed as 1.1 years.

In relation to customer relationships acquired in business combinations, the most significant judgements relate to assumptions for the open-ended and, segregated and similar 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 2017:

		Open ended	Segregated and similar
		£m	£m
20% increase in net attrition		(28)	(51)
10% one-off decrease in AUM at 1 January 2018		(20)	(36)
Operating margin percentage decreased by 2.5		(21)	(37)
Discount rate percentage increased by 2		(12)	(24)

The carrying value of the life company customer relationships/contracts acquired through Ignis at 31 December 2017 is £50m (2016: £58m). Increasing the discount rate by 2% or decreasing the operating margin by 5% would not result in an impairment loss and therefore would have no impact on carrying value. The remaining amortisation period of the life contracts is 7 years.

Goodwill allocated to the Aberdeen Standard Investments group of cash-generating units is significant in comparison to the total value of goodwill. The recoverable amount of this group of cash-generating units is based on fair value less costs of disposal. The key assumption used to measure fair value is a price/earnings ratio. Given the recent acquisition of Aberdeen we have used the price/earnings ratio of this transaction, which is comparable with price/earnings ratios of similar asset management businesses at the impairment testing date, to calculate fair value. This fair value measurement would be categorised as level 3 in the fair value hierarchy. A reasonably possible change in the price/earnings ratio would not result in an impairment.

15.   Deferred acquisition costs

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

Pensions and Savings - 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.

India and China life - insurance contracts

The Group's policy for acquisition costs incurred on insurance contracts issued by overseas subsidiaries is to apply the policy used in the issuing entity's local statutory or regulatory reporting or, where local reporting did not explicitly or implicitly defer acquisition costs at the time the overseas subsidiary was first consolidated, to adjust those policies to apply a policy similar to that described above for non-participating insurance contracts.

Non-participating investment contracts and asset management contracts

Incremental costs directly attributable to securing rights to receive fees for asset management services either sold with unit linked investment contracts or in other asset management services 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.

		2017	2016
	Notes	£m	£m
At 1 January		651	646
Additions during the year	6	49	51
Reclassified as held for sale during the year		(22)	-
Amortisation charge	6	(79)	(96)
Foreign exchange adjustment		13	50
At 31 December		612	651

The amount of deferred acquisition costs expected to be recovered after more than 12 months is £536m (2016: £566m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £356m (2016: £389m).

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, investments in associates and joint ventures are initially recognised at cost and include any goodwill identified on acquisition. 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 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 fair value through profit or loss (FVTPL).

During the year ended 31 December 2017 we have 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 is to make the financial statements more relevant to users as it is more consistent with peers. Following the presentational change discussed in part (c) of this note, this change in accounting policy only impacts 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 with comparatives restated.

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

Investments in associates and joint ventures accounted for using the equity method of £503m (2016: £572m) includes £nil (2016: £3m) in relation to loans to associates and joint ventures.

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 accounted for using the equity method

The following are particulars of the Group's principal associates.

	HDFC Standard Life Insurance Company Limited		HDFC Asset Management Company Limited
Country of incorporation and registration	India		India
	2017	2016	2017	2016
	£m	£m	£m	£m
Summarised financial information of associate:
Revenue	3,736	2,844	193	175
Profit after tax	123	99	73	58
Other comprehensive income/(expense)	-	(5)	-	-
Total assets	12,102	10,199	471	345
Total liabilities	11,589	9,776	221	180
Net assets	513	423	250	165
Interest held	29.3%	35.0%	38.2%	39.9%
Share of net assets	151	148	96	66
Associates accounted for using the equity method	304	363	90	111
Associates classified as held for sale	-	-	33	-
Total amount recognised in consolidated statement of financial position	304	363	123	111
Dividends received	10	8	12	8

In July 2017, HDFC Standard Life Insurance Company Limited (HDFC Life) announced that its board of directors had approved proceeding with an initial public offering (IPO), with the Group offering up to 5.43% of the paid-up equity share capital of HDFC Life. Refer Note 1 for further details. Following the IPO, the Group's interest in HDFC Life has decreased to 29.3% (2016: 35.0%). A gain on sale of £302m has been recognised in the consolidated income statement.

The difference between the carrying value of this associate and the Group's current share of net assets is due primarily to goodwill and intangible assets of £157m (2016: £210m) arising from additional investments being made at fair value rather than book value. The fair value of the Group's investment in HDFC Life at 31 December 2017 is £2,636m.

In November 2017, HDFC Asset Management Company Limited (HDFC AMC) announced that its board of directors had approved initiation of the process of an IPO subject to receipt of necessary approvals, with the Group offering a portion of the paid up equity share capital of HDFC AMC. As a result a portion of the equity share capital of the associate has been classified as held for sale as at 31 December 2017. Refer Note 24 for further details.

HDFC AMC is unlisted and manages a range of mutual funds and provides portfolio management and advisory services. The Group's share of post-acquisition movements in reserves of HDFC AMC which have been recognised directly in equity, have not been reflected in the carrying value of the associate. As a result there is a difference between the carrying value of the associate and the Group's share of net assets.

The year end date for HDFC AMC and 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 30 September and 31 December is used for HDFC AMC and HDFC Life respectively.

(b)     Investments in joint ventures

The following are particulars of the Group's principal joint venture which is unlisted:

			Heng An Standard Life Insurance Company
Country of incorporation and registration			China
			2017	2016
			£m	£m
Summarised financial information of joint venture:
Revenue			358	254
Profit after tax			20	15
Other comprehensive income/(expense)			7	(15)
Total assets			1,358	1,212
Total liabilities			1,160	1,035
Net assets			198	177
Interest held			50%	50%
Current share of net assets			99	88
Carrying value of joint venture			99	88
Dividends received			-	-

(c)     Investments in associates measured at FVTPL

The aggregate fair value of associates accounted for at FVTPL at 31 December 2017 is £5,936m (2016: £4,797m restated) none of which are considered individually material to the Group as the investments are primarily held by unit linked funds. 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 (2016: none).

Presentational change

A presentational change has been made to the consolidated statement of financial position to include associates measured at FVTPL within 'Equity securities and interests in pooled investment funds'. Previously these were included within 'Investments in associates and joint ventures' which has been renamed 'Investments in associates and joint ventures accounted for using the equity method'. The reason for the change is to make the presentation more relevant to the users of the financial statements as it is more consistent with peers. The carrying value of associates measured at FVTPL at 31 December 2016 was £4,797m restated (2015: £5,025m restated) and the consolidated statement of financial position comparative has been updated to reflect the change in presentation.

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.

		2017	2016
	Notes	£m	£m
At 1 January		9,929	9,991
Reclassifications1		(544)	(191)
Additions - acquisitions2		270	1,624
Additions - subsequent expenditure		143	131
Net fair value gains/(losses)	4	485	(302)
Disposals		(525)	(1,337)
Transferred to owner occupied property	18	(17)	(28)
Foreign exchange adjustment		11	44
Other		(3)	(3)
At 31 December		9,749	9,929
The fair value of investment property can be analysed as:
Freehold		7,297	7,271
Long leasehold		2,452	2,658
		9,749	9,929

¹    During 2017 investment property measured at £225m (2016: £191m) was reclassified as held for sale and income strips measured at £319m were reclassified as debt securities. Refer Note 41 for further details on income strips.

²    Additions - acquisitions includes £nil (2016: £1,289) relating to the merger of property investment vehicles.

The rental income arising from investment property during the year amounted to £508m (2016: £555m). Direct operating expenses (included within other administrative expenses) arising in respect of such rented property during the year amounted to £70m (2016: £75m).

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:

		2017	2016
		£m	£m
Not later than one year		470	477
Later than one year and no later than five years		1,488	1,529
Later than five years		3,392	4,028
Total operating lease receivables		5,350	6,034

 

Estimates and assumptions

Determination of the fair value of investment property is a key estimate. The methods and assumptions used to determine fair value of investment property are discussed in Note 41.

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 2016		55	138	193
Additions		1	9	10
Transferred from investment property	17	28	-	28
Reclassified as held for sale		(8)	-	(8)
Disposals and adjustments1		(22)	(10)	(32)
Revaluations		5	-	5
Impairment losses recognised	6	(1)	-	(1)
Foreign exchange adjustment		-	1	1
At 31 December 2016		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		(4)	(2)	(6)
Disposals and adjustments1		-	(3)	(3)
Revaluations		1	-	1
Impairment losses reversed	6	4	-	4
Foreign exchange adjustment		-	(1)	(1)
At 31 December 2017		81	182	263
Accumulated depreciation
At 1 January 2016		-	(102)	(102)
Depreciation charge for the year	6	-	(14)	(14)
Disposals and adjustments1		-	9	9
At 31 December 2016		-	(107)	(107)
Depreciation charge for the year	6	-	(15)	(15)
Disposals and adjustments1		-	5	5
At 31 December 2017		-	(117)	(117)
Carrying amount
At 1 January 2016		55	36	91
At 31 December 2016		58	31	89
At 31 December 2017		81	65	146

¹    For the year ended 31 December 2017 £1m (2016: £4m) 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 £112m (2016: £93m). 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	Available- for-sale	Loans and receivables	Total
2017	Notes	£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

 

		Designated as at fair value through profit or loss	Held for trading	Available- for-sale	Loans and receivables	Total
2016	Notes	£m	£m	£m	£m	£m
Investments in associates and joint ventures	16	-	-	-	3	3
Loans	20	-	-	-	295	295
Derivative financial assets	21	-	3,534	-	-	3,534
Equity securities and interests in pooled investment funds	39	90,683	-	-	-	90,683
Debt securities	39	67,312	-	621	-	67,933
Receivables and other financial assets	22	10	-	-	1,245	1,255
Cash and cash equivalents	25	-	-	-	7,938	7,938
Total		158,005	3,534	621	9,481	171,641

The amount of debt securities expected to be recovered or settled after more than 12 months is £50,619m (2016: £55,591m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.

Estimates and assumptions

Determination of the fair value of private equity investments and those debt securities categorised as level 3 in the fair value hierarchy 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.

		2017	2016
	Notes	£m	£m
Loans secured by mortgages	41(e)	57	73
Loans and advances to banks with greater than three months to maturity from acquisition date		32	220
Loans secured on policies		2	2
Loans	39	91	295

Loans with variable rates and fixed interest rates are £38m and £53m respectively (2016: £52m and £243m respectively). Loans that are expected to be recovered after more than 12 months are £60m (2016: £88m).

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.

 

		2017			2016
		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	33	562	-	33	9	-	-
Net investment hedges		6	-	-	6	-	-
Held for trading	19,33	160,838	3,053	780	119,926	3,534	965
Derivative financial instruments	39	161,406	3,053	813	119,941	3,534	965

Derivative assets of £1,957m (2016: £2,460m) are expected to be recovered after more than 12 months. Derivative liabilities of £318m (2016: £215m) 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 liability position of £33m (2016: £nil). During the year ended 31 December 2017 losses of £33m (2016: £nil) were recognised in other comprehensive income in relation to the cross-currency swap. In addition £13m (2016: £nil) and less than £1m (2016: £nil) was transferred from other comprehensive income to Investment return and Finance costs respectively in the consolidated income statement.

In addition foreign exchange contracts with an aggregate notional principal amount of £8m (2016: £9m) and a net fair value liability position of less than £1m (2016: less than £1m) were designated as hedges of future cash flows arising from revenue receivable in foreign currency. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2017 and 2016, 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 (2016: £6m) and a net fair value asset position of less than £1m (2016: liability of less than £1m) were designated as net investment hedges and gave rise to gains for the year of less than £1m (2016: losses 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 2017, the losses recognised in the consolidated income statement were less than £1m (2016: 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.

	2017			2016
	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	13,244	155	112	5,907	33	88
Variance swaps	13	44	50	17	27	22
Options	7,390	760	37	3,397	571	8
Total return swaps	714	4	16	2,313	3	38
Bond derivatives:
Futures	25,104	116	50	34,125	247	96
Interest rate derivatives:
Swaps	65,346	686	215	22,604	762	148
Floors	40	6	-	44	8	-
Options	-	-	-	-	-	-
Swaptions	6,521	835	6	5,980	1,097	-
Foreign exchange derivatives:
Forwards	35,849	345	234	42,228	704	506
Futures	-	-	-	-	-	-
Options	-	-	-	1	-	-
Other derivatives:
Inflation rate swaps	5,464	39	49	2,032	27	41
Credit default swaps	1,153	63	11	1,278	55	18
Derivative financial instruments held for trading	160,838	3,053	780	119,926	3,534	965

(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
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

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
2016	£m	£m	£m	£m	£m	£m	£m
Cash inflows
Derivative financial assets	23,319	448	355	172	221	744	25,259
Derivative financial liabilities	14,060	11	-	-	1	-	14,072
Total	37,379	459	355	172	222	744	39,331
Cash outflows
Derivative financial assets	(22,175)	(2)	(4)	(16)	(11)	-	(22,208)
Derivative financial liabilities	(14,821)	(46)	(23)	(14)	(32)	(147)	(15,083)
Total	(36,996)	(48)	(27)	(30)	(43)	(147)	(37,291)
Net derivative financial instruments cash inflows	383	411	328	142	179	597	2,040

22.   Receivables and other financial assets

		2017	2016
	Notes	£m	£m
Amounts receivable on direct insurance business		71	82
Amounts receivable on reinsurance contracts		2	1
Outstanding sales of investment securities		125	196
Accrued income		388	223
Cancellations of units awaiting settlement		219	317
Collateral pledged in respect of derivative contracts	39	46	30
Property related assets		154	156
Contingent consideration asset	41	6	10
Other		231	240
Receivables and other financial assets		1,242	1,255

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 £85m (2016: £77m).

23.   Other assets

		2017	2016
		£m	£m
Prepayments		72	41
Other		113	53
Other assets		185	94

The amount of other assets expected to be recovered after more than 12 months is £7m (2016: £4m).

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.

		2017	2016
		£m	£m
Assets of operations held for sale
Standard Life (Asia) Limited		703	-
Investment vehicles		91	27
Investments in associates accounted for using the equity method		33	-
Investment and owner occupied property 1		211	236
Assets held for sale		1,038	263
Liabilities of operations held for sale			-
Standard Life (Asia) Limited		678	-
Investment vehicles		28	-
Liabilities of operations held for sale		706	-

¹    Consists of £199m investment property (2016: £228m) and £12m owner occupied property (2016: £8m).

(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, both of which are reported within the India and China life segment. The transaction is subject to obtaining local regulatory and other approvals in mainland China and Hong Kong.

At 31 December 2017, this disposal group was measured at fair value less cost to sell and comprised the following assets and liabilities:

	2017
	£m
Assets of operations held for sale
Equity securities and interests in pooled investment funds	638
Cash and cash equivalents	31
Other assets	34
Total assets of operations held for sale	703
Liabilities of operations held for sale
Non-participating insurance contract liabilities	603
Non-participating investment contract liabilities	62
Other liabilities	13
Total liabilities of operations held for sale	678
Net assets of operations held for sale	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 £24m has been included in Other administrative expenses in the consolidated income statement. Fair value has been determined by reference to the expected sale price.

(b) HDFC Asset Management Company Limited (HDFC AMC)
On 30 November 2017, HDFC Asset Management Company Limited (HDFC AMC), which is reported within the Aberdeen Standard Investments 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 is classified as held for sale at 31 December 2017.

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.

		2017	2016
		£m	£m
Cash at bank and in hand		1,559	753
Money at call, term deposits and debt instruments with less than three months to maturity from acquisition		8,667	7,185
Cash and cash equivalents		10,226	7,938

 

		2017	2016
	Notes	£m	£m
Cash and cash equivalents		10,226	7,938
Cash and cash equivalents classified as held for sale	24	31	-
Bank overdrafts	37	(542)	(38)
Total cash and cash equivalents for consolidated statement of cash flows		9,715	7,900

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 £661m (2016: £nil) and £533m (2016: £nil) relating to cash and overdrafts held by Aberdeen, which are held 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 £118m (2016: £nil) 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 with profits funds (participating business) and 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:

	2017		2016
Issued shares fully paid	12 2/9p each	£m	12 2/9p each	£m
At 1 January	1,978,884,437	242	1,969,937,375	241
Shares issued in respect of business combinations	997,661,231	122	-	-
Shares issued in respect of share incentive plans	496,817	-	460,194	-
Shares issued in respect of share options	1,894,392	-	8,486,868	1
At 31 December	2,978,936,877	364	1,978,884,437	242

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

Shares issued in respect of business combinations relates 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)     Share premium

				2017	2016
				£m	£m
1 January				634	628
Shares issued in respect of share options				5	6
31 December				639	634

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 in trust at 31 December 2017 was as follows:

				2017	2016
Number of shares held in trust
Employee Share Trust				16,031,679	1,287,431
Aberdeen Asset Management Employee Benefit Trust 2003				23,704,305	-
Unclaimed Asset Trust				180,766	12,999,801

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.

		2017	2016
	Notes	£m	£m
At 1 January		2,855	2,162
Recognised in comprehensive income
Recognised in profit for the year attributable to equity holders		699	368
Recognised in other comprehensive income
Remeasurement (losses)/gains on defined benefit pension plans	35	(18)	162
Share of other comprehensive income/(expense) of associates and joint ventures		4	(10)
Aggregate tax items recognised in other comprehensive income		(10)	2
Total items recognised in comprehensive income		675	522
Recognised directly in equity
Dividends paid on ordinary shares		(469)	(370)
Transfer for vested employee share-based payments		86	23
Cancellation of capital redemption reserve	29	-	488
Sale of shares held by trusts		4	-
Reclassification of perpetual notes to liability		19	-
Shares distributed by employee and other trusts		(8)	(7)
Expiry of unclaimed asset trust claim period		-	41
Aggregate tax items recognised in equity		-	(4)
Total items recognised directly in equity		(368)	171
At 31 December		3,162	2,855

Transfer for vested employee share-based payments includes £32m (2016: £nil) 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.

In addition to unclaimed shares, which are referred to in Note 27, the UAT held cash in relation to unclaimed cash entitlements arising from both cash entitlements which were allocated to eligible members of the mutual company at the date of demutualisation and dividends received on shares held in the UAT. On expiry of the UAT claim period on 9 July 2016, the entitlement to the unclaimed assets remaining in the UAT transferred to the Group. The expiry resulted in the derecognition of a liability of £41m to eligible members in relation to their cash entitlements, which was recognised directly in retained earnings in equity during the year ended 31 December 2016.

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. On disposal or impairment of such a subsidiary the related component of the merger reserve is released to retained earnings. 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.

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 the 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.

The following tables show the movements in other reserves during the year.

		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 reserves credit for employee share based payments includes £57m (2016: £nil) in relation to replacement awards granted to employees of Aberdeen which were unvested at the acquisition date.

		Revaluation of owner occupied property	Foreign currency translation	Available-for-sale financial assets	Merger reserve	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Capital redemption reserve	Total
2016	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January		-	(7)	1	2,080	53	241	(1,879)	488	977
Recognised in other comprehensive income
Fair value gains on available-for-sale financial assets		-	-	17	-	-	-	-	-	17
Revaluation of owner occupied property	18	5	-	-	-	-	-	-	-	5
Exchange differences on translating foreign operations		-	173	-	-	-	-	-	-	173
With profits funds: Associated UDS movement recognised in other comprehensive income	31	(5)	(62)	-	-	-	-	-	-	(67)
Aggregate tax effect of items recognised in other comprehensive income		-	-	(3)	-	-	-	-	-	(3)
Total items recognised in other comprehensive income		-	111	14	-	-	-	-	-	125
Recognised directly in equity
Reserves credit for employee share-based payments		-	-	-	-	30	-	-	-	30
Transfer to retained earnings for vested employee share-based payments	28	-	-	-	-	(23)	-	-	-	(23)
Cancellation of capital redemption reserve		-	-	-	-	-	-	-	(488)	(488)
Aggregate tax effect of items recognised directly in equity		-	-	-	-	(3)	-	-	-	(3)
Total items recognised directly within equity		-	-	-	-	4	-	-	(488)	(484)
At 31 December		-	104	15	2,080	57	241	(1,879)	-	618

On 17 June 2016 the Company's capital redemption reserve was cancelled in accordance with section 649 of the Companies Act 2006 resulting in a transfer of £488m to retained earnings.

30.   Non-controlling interests

Non-controlling interests include preference shares and until December 2017, perpetual notes issued by Aberdeen Asset Management PLC. These are classified as equity whilst no contractual obligation to deliver cash exists.

A reconciliation of movements in non-controlling interests - ordinary shares during the year is provided in Note 42.

(a)     Non-controlling interests - ordinary shares

Included in non-controlling interests - ordinary shares of £289m (2016: £297m) are non-controlling interests of Standard Life Private Equity Trust plc (SLPET) of £269m (2016: £251m) which is considered material to the Group. Non-controlling interests own 44% (2016: 45%) of the voting rights of SLPET. The profit allocated to non-controlling interests of SLPET for the year ended 31 December 2017 is £24m (2016: £49m). Dividends paid to non-controlling interests of SLPET during the year ended 31 December 2016 were £7m (2016: £4m).

Summarised financial information for SLPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2017 and 2016 which is SLPET's financial reporting date and is considered indicative of the interest that non-controlling interests of SLPET have in the Group's activities and cash flows. The financial statements of SLPET for the years ended 30 September 2017 and 2016 have been adjusted for market movements and any other significant events or transactions for the three months to 31 December for the purposes of consolidation into the Group's consolidated financial statements for the years ended 31 December 2017 and 2016 respectively.

	2017	2016
SLPET 30 September	£m	£m
Statement of financial position:
Total assets	600	540
Total liabilities	1	7
Income statement:
Revenue	89	119
Profit after tax	81	107
Total comprehensive income	81	107
Cash flows:
Cash flows from operating activities	2	5
Cash flows from investing activities	1	73
Cash flows from financing activities	(15)	(13)
Net (decrease)/increase in cash equivalents	(12)	65

There are 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 notes

	2017	2016
	£m	£m
5% 2015 Non-voting perpetual non-cumulative redeemable preference shares	99	-

On the acquisition of Aberdeen as discussed in Note 1, the Group recognised preference shares and perpetual capital notes issued by Aberdeen Asset Management PLC as non-controlling interests.

(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. Since acquisition no dividends have been declared or paid on the preference shares.

The preference shares can be converted irrevocably into a fixed number of ordinary shares 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%. This is a regulatory requirement to enable the preference shares to be treated as Additional Tier 1 capital. The CET1 ratio (unaudited) at 31 December 2017 was 36.2%.

(b)(ii) Perpetual  notes

The perpetual capital notes bear interest on their principal amount at 7.0% per annum, the discretionary coupons are payable quarterly in arrears on 1 March, 1 June, 1 September and 1 December in each year. Interest accrues on any deferred payments. On 18 December 2017 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 with fair value movements since acquisition of £17m being transferred to retained earnings. On reclassification £2m in relation to tax allocated to non-controlling interests was also transferred to retained earnings.

During the year ended 31 December 2017 £8m (2016: £nil) was recognised directly in equity (net of tax) and £2m (2016: £nil) was recognised in Finance costs in the consolidated income statement in relation to coupons payable. The coupons payable on perpetual notes are tax deductible.