Annual Report and Accounts 2007

Financial Statements

Notes to the parent company accounts

1. Accounting policies

1.1 Basis of preparation

Friends Provident plc (the Company) is a limited liability company, incorporated in the UK, whose shares are publicly traded.

The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost convention as modified by the revaluation of investments as set out in note 1.2.3.

The Company has continued to present individual financial statements prepared on a UK Generally Accepted Accounting Practice basis as permitted by section 226(A) and Schedule 4 to the Companies Act 1985 and has adopted the exemption of omitting the profit and loss account as permitted by section 230 of that Act.

All accounting policies have been reviewed for appropriateness in accordance with Financial Reporting Standards.

FRS29 (IFRS7) Financial Instruments: Disclosures was effective from 1 January 2007. The Company is exempt from the standard as the disclosures are contained within the notes to the Group consolidated financial statements.

In accordance with FRS1, the Company is exempt from the requirement to prepare a cash flow statement on the grounds that this is provided in its consolidated financial statements.

1.2 Significant accounting policies

1.2.1 Investment return

Investment return excludes revaluation of Group investments, and includes dividends, interest, rents, gains and losses on the realisation of assets and unrealised gains and losses. Such income includes any withholding tax but excludes other tax credits, such as attributable tax credits. Income from fixed-interest securities together with interest, rents, and associated expenses are accounted for in the period in which they accrue. Dividends are included in the profit and loss account when the securities are listed as ex-dividend. Realised gains or losses on investments are calculated as the difference between the net sale proceeds and original cost. Unrealised gains and losses on investments represent the difference between the valuation of investments at the balance sheet date and their original cost, or if they have been previously revalued, the valuation at the last balance sheet date. The movement in unrealised gains and losses recognised in the period also includes the reversal of unrealised gains and losses recognised in earlier accounting periods in respect of disposals in the current period.

1.2.2 Taxation

Taxation is based on profits and income for the period as determined in accordance with the relevant tax legislation, the movement in deferred tax and adjustments to prior periods' tax. Provision is made for deferred taxation liabilities, using the liability method, on all material timing differences, including revaluation gains and losses on investments recognised in the profit and loss account, as the investments are revalued. Deferred taxation is calculated at the rates at which it is expected that the tax will arise, and discounted to take into account the likely timing of payments and pattern of expected realisation of investments. Deferred taxation is recognised in the profit and loss account for the period, except to the extent that it is attributable to a gain or loss that is recognised directly in the statement of total recognised gains and losses.

1.2.3 Valuation of investments

Investments are shown in the balance sheet as follows:

  1. Unlisted investments are valued by the directors, having regard to their likely realisable value.
  2. Listed and other quoted investments, including those in participating interests, are carried at bid value at the balance sheet date.
  3. Shares in Group undertakings are stated at current value. Revaluation gains, and their reversal, and temporary diminutions in value are recognised as a transfer to the revaluation reserve. Revaluation losses and their reversal, are recognised in the profit and loss account.

1.2.4 Share based payments

The Company operates share based payment schemes for employees of the Group, depending on eligibility. The fair value of these equity-settled share based payments is measured at the grant date, and the cost is borne by the subsidiary companies. The fair value is added to the cost of the Company's investments in its subsidiary undertakings and a corresponding credit is made to reserves.

1.2.5 Interest-bearing loans and borrowings

Borrowings are recognised initially at cost, being the fair value of the consideration received, net of transaction costs incurred, and subsequently stated at amortised cost. Any difference between the proceeds, net of transaction costs, and the redemption value is recognised in the profit and loss account over the period of the borrowings, using the effective interest method.

Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments. Compound financial instruments are split and recorded respectively within each of its two components, equity and liability. Transaction costs that relate to the issue of a compound financial instrument are also allocated to the equity and liability components in proportion to the allocation of proceeds. The equity components of the convertible notes are calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The equity component is recognised and included in shareholders' equity, net of tax effects. The fair value of the liability component is recorded on an amortised cost basis until extinguished on conversion or maturity of the bonds.

The interest expense recognised in the profit and loss account under interest payable is calculated using the effective interest rate method.

1.2.6 Foreign currencies

Monetary assets and liabilities held in foreign currencies at the balance sheet date are expressed in sterling at rates ruling on that date. Income and expenditure denominated in foreign currencies are translated at rates ruling at the date on which the transaction occurs. All resulting exchange gains and losses are included within the part of the profit and loss account in which the underlying transaction is reported.

2. Investments in Group undertakings

  Subsidiary undertakings m Loans to Group undertakings m Total investments m
Current value      
At 1 January 2007 4,441 305 4,746
Additions 163 - 163
Repayment of capital (17) (5) (22)
Revaluations (516) - (516)
At 31 December 2007 4,071 300 4,371
Cost      
At 1 January 2007 3,176 305 3,481
Additions 163 - 163
Repayment of capital (17) (5) (22)
At 31 December 2007 3,322 300 3,622

Additions include 103m relating to the acquisition of Sesame and Pantheon Financial (see note 42 to the Group's consolidated financial statements) by subsidiary undertaking Friends Provident Distribution Holdings Limited, 31m investment in The Asset Hub Limited, 13m investment in F&C, 5m in share based payment transactions with Friends Provident Management Services Limited (FPMS) and a further 11m in respect of future consideration for Lombard (see note 4).

Investments in Group undertakings on a historical cost basis are valued at 3,322m (2006: 3,176m).

The principal subsidiary undertakings of the Company as at 31 December 2007 are set out in note 19 to the Group's consolidated financial statements. A list of all subsidiary undertakings is filed at UK Companies House with the Company's Annual Return.

3. Convertible bonds and loan notes

The convertible bonds were converted into ordinary shares in 2007 (see note 38 to the Group's consolidated financial statements). The carrying amount at 31 December 2006 was 283m.

The loan notes were issued as part consideration for Lombard (see note 33 to the Group's consolidated financial statements).

4. Provisions

  Future consideration for Lombard
m
Share entitlements
m
Total
m
At 1 January 2006 146 9 155
Adjustment to consideration (12) - (12)
Utilised in the year (59) - (59)
At 31 December 2006 75 9 84
Increase in consideration 11 - 11
Utilised in the year (86) (1) (87)
At 31 December 2007 - 8 8

The share entitlement provision represents expected future claims on share entitlements not claimed following demutualisation.

Total creditors amount to 67m (2006: 402m).

5. Share capital and share premium

Details of the Company's share capital and share premium are set out in note 38 to the Group's consolidated financial statements.

6. Other equity

Other equity consists of Step-up Tier one Insurance Capital Securities (STICS) of 810m (2006: 810m) that were issued in 2003 and 2005. Details of the Company's STICS are set out in note 40 to the Group's consolidated financial statements.

7. Reserves

  Revaluation reserve
m
Retained earnings
m
At 1 January 2007 1,266 296
Profit for the financial year - 186
Dividend - (168)
Share based payments - 5
Revaluation of investments (428) -
Transfer (88) 88
At 31 December 2007 750 407

In accordance with the Companies Act 1985, the directors have considered the valuation of all fixed assets and are satisfied that the aggregate value of all assets is not less than the book value as stated in the Company's balance sheet. Therefore, in accordance with the Companies Act 1985 Section 275, certain losses on fixed assets have been treated as unrealised losses. In order to reflect this, a transfer of 88m has been made between the revaluation reserve and the profit and loss account. In 2006, a transfer of 92m was made to the revaluation reserve. Transfers to the revaluation reserve include a 42m decrease in the current value of F&C Asset Management plc.

8. Directors and employees

The Company does not directly employ any staff. The directors and employees who provide services to the Company are employed by, and receive their remuneration from FPMS, a Group undertaking. Included within the management recharges from FPMS for 2007 is an allowance for directors' and employees' emoluments in respect of their services to the Company.

Full details of directors' emoluments are contained in the Remuneration Report of the Board, set out here to the Group's consolidated financial statements.

9. Related party transactions

The Company is exempt from the requirements of FRS 8, concerning the disclosure of transactions with other companies that qualify as related parties within the Group, as the Company's financial statements are presented together with the Group's consolidated financial statements.

Details of key management transactions are set out in note 44 to the Group's consolidated financial statements.

10. Guarantees

The Company has given a guarantee to its subsidiary undertaking, FPMS for at least 12 months from the date of approval of its financial statements.