- 1. Accounting Policies
- 2. Risk Management
- 3. Dividends and other Distributions
- 4. Directors’ emoluments and other employee information
- 5. Pensions
- 6. Share-based payments
- 7. Auditors’ remuneration
- 8. Investments
- 9. Derivative assets and liabilities
- 10. Other creditors and accruals
- 11. Borrowings
- 12. Share capital and share premium
- 13. Movement in reserves
- 14. Subsidiary undertakings
1. Accounting Policies
Basis of preparation
The Company’s financial statements have been prepared under the historical cost convention, modified by the revaluation of certain assets, as required by the Companies Act 1985 and in accordance with applicable UK accounting standards.
The Company’s financial statements have been prepared in compliance with Section 226 of, and Schedule 4 to, the Companies Act 1985 adopting the exemption of omitting the profit and loss account conferred by Section 230 of that Act.
In December 2005 the ASB issued an amendment to Financial Reporting Standard (FRS) 26 ‘Financial Instruments: Recognition and Measurement’. This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value and subsequently measured at the higher of:
- (a)
- the unamortised balance of the related fees received and deferred; and
- (b)
- the expenditure required to settle the commitment at the balance sheet date.
The amendment is effective for accounting periods beginning on or after 1 January 2006 and has been adopted by the Company in the 2006 accounts.
Investment income
Investment income includes dividends and interest. Dividends receivable from Group companies are recognised in the period in which the dividends are declared and approved at the general meeting or paid. Interest income is recognised using the effective interest method.
Distributions
Dividend distribution to the Company’s shareholders is recognised as a liability in the period in which the dividends are authorised and are no longer at the discretion of the Company. Final dividends are accrued when approved by the Company’s shareholders at the general meeting and interim dividends are accrued when paid.
Interest expense
Interest expense reflects the underlying cost of borrowing, based on the effective interest method, and includes payments and receipts made under derivative instruments which are amortised over the interest period to which they relate.
Investment in subsidiary undertakings
Shares in subsidiary undertakings are stated at the Company’s share of their net assets. Unrealised gains or losses arising on investments in subsidiary undertakings are taken to the revaluation reserve.
Loans and receivables
Loans and receivables are held at amortised cost using the effective interest rate method.
Derivative financial instruments and hedge accounting
The Company’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates. The Company uses derivatives, such as foreign exchange forward contracts and interest rate swap contracts, to hedge these exposures. The Company uses hedge accounting, provided the prescribed criteria are met, to recognise the offsetting effects of changes in the fair value or cash flow of the derivative instrument and the hedged item. The Company’s principal use of hedge accounting is to hedge the fair value movements in loans due to interest rate and exchange rate fluctuations. Any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the profit and loss account. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the profit and loss account. The relationship between the hedging instrument and the hedged item, together with the risk management objective and strategy for undertaking the hedge transaction, are documented at the inception of the transaction. The effectiveness of the hedge is documented and monitored on an ongoing basis. Hedge accounting is only applied for highly effective hedges (between 80% and 125% effectiveness) with any ineffective portion of the gain or loss recognised in the profit and loss account in the current period.
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any such derivative instruments are recognised immediately in the profit and loss account.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs. Borrowings classified as liabilities are subsequently stated at amortised cost. The difference between the proceeds and the redemption value is recognised in the profit and loss account over the borrowing period using the effective interest method.
For a convertible bond which includes a cash settlement option in lieu of the issue of shares on conversion, the conversion option is separated and recognised as a derivative liability. The liability is revalued to fair value at each reporting period, with fair value gains and losses taken through the profit and loss account. The remainder of the proceeds, less attributable expenses, is allocated to the value of the debt portion of the convertible bond. This amount is recorded as a liability on an amortised cost basis, using the effective interest rate, until extinguished on conversion or on maturity of the bond.
Deferred tax
Deferred tax is recognised in respect of timing differences which have not reversed at the balance sheet date and which result in an obligation to pay more tax, or a right to pay less tax, at a future date. Deferred tax is measured at rates expected to apply when the timing differences reverse, based on current tax rates and law. Deferred tax assets are recognised to the extent that it is more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
Foreign currencies
Foreign currency transactions are translated into sterling, the Company’s functional and presentational currency, using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses are recognised in the profit and loss account.
Pension costs
The Company participates in multi-employer defined benefit schemes, within the meaning of FRS 17, ‘Retirement Benefits’, which, as its share of the underlying assets and liabilities cannot be identified, have been treated for reporting purposes as defined contribution schemes. In addition to these schemes the Company also contributes to defined contribution schemes. The Company charges the costs of its pension schemes against profit as incurred. Any difference between the cumulative amounts charged against profits and contribution amounts paid is included as a provision or prepayment in the balance sheet.
The assets of the defined benefit schemes are held in separate trustee administered funds, which have been subject to regular valuation every three years and updated by formal reviews at reporting dates by qualified actuaries who were employees of the Group.
Share-based payments
The Company operates a number of share based payment plans on behalf of its subsidiaries. The fair value of the equity instruments granted is spread over the vesting period of the instrument and treated as a capital contribution to the respective subsidiary. The total capital contribution is determined by reference to the fair value of the awards, excluding the impact of any non-market vesting conditions.
At each balance sheet date, the Company revises its estimate of the number of equity instruments which are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the cost of the investment in the subsidiary and a corresponding adjustment is made to equity over the remaining vesting period. On vesting or exercise, the difference between the accumulated capital contribution and the actual cost to the Company is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital and share premium. Any capital contribution is subsequently recharged to the respective subsidiary as incurred and the corresponding cost of investment is reduced.
2. Risk Management
Management of risk
The Company, in the course of its business activities, is exposed to market, credit and liquidity risk. Overall responsibility for the management of these risks is vested in the Board. To support it in this role, a risk framework is in place comprising a structure of formal committees, risk assessment and reporting processes and risk review functions. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of risks is being performed.
Risk assessment processes
A continuous process is in place formally identifying, evaluating and managing the significant risks to the achievement of the Company’s objectives. A standard approach is used to assess risks.
Senior management and the risk review functions (see below) review the output of the assessments.
Risk review functions
The Company’s risk review function provides an oversight of the risk management processes within the Company. Its responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of these changes on risks to business and the monitoring of the mitigating actions. The risk review function also ensures that risk committees are provided with meaningful risk reports and that there is appropriate information to assess risk issues.
Details of the categories of risk to the Company and high-level management processes are set out below. The Company has defined policies for the management of its key risks, the operation of which are supported by risk review functions and are independently confirmed by Group internal audit.
Market risk
Market risk is the risk arising from fluctuations in interest and exchange rates and market valuations.
Credit risk
Credit risk is the risk that the Company is exposed to loss if another party fails to perform its financial obligations to the Company.
Credit risk is not sought in its own right. Credit risk is managed through the setting and regular review of detailed counterparty credit and concentration limits. Compliance with these limits for investment and treasury transactions is monitored daily. The Group Credit Committee oversees these processes. Counterparties used for the provision of hedging derivatives have a minimum credit rating of A from Standard & Poor’s. The Company’s maximum exposure to credit risk on its financial assets at the balance sheet date is equal to the value of the derivative assets.
Liquidity risk
Liquidity risk is the risk that the Company, though solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they fall due, or can secure them only at excessive costs.
A degree of liquidity risk is implicit in the Company. Liquidity risk arises as a consequence of the uncertainty surrounding the value and timing of cash flows. The Company’s treasury function manages liquidity to ensure that it maintains sufficient liquid assets and standby facilities to meet a prudent estimate of its net cash outflows over a period of two years.
3. Dividends and other distributions
| 2006
Per Share p |
2005
Per Share p |
2006
Total £m |
2005
Total £m |
|
|---|---|---|---|---|
| Ordinary share dividend paid in the year | ||||
| – Prior year final dividend | 3.63 | 3.45 | 236 | 224 |
| – Current year interim dividend | 1.74 | 1.65 | 113 | 107 |
| 5.37 | 5.10 | 349 | 331 | |
| Distributions paid on subordinated borrowings designated as equity | — | 16 | ||
| 349 | 347 | |||
| Ordinary share dividend proposed(1) | 3.81 | 3.63 | 248 | 236 |
- 1.
- The dividend proposed has not been included as a liability in the balance sheet.
4. Directors’ emoluments and other employee information
Full disclosures of the Group Plc directors’ emoluments are contained within those parts of the Directors’ Report on Remuneration which are described as having been audited. At 31 December 2006 there were no loans outstanding with directors of the Company (2005: £nil). The Company has no other employees.
5. Pensions
The Company operates the following pension schemes in the UK. There were no contributions prepaid or outstanding at either 31 December 2006 or 31 December 2005 in respect of these schemes and the Company has no liability for retirement benefits.
- Legal & General Group UK Pension and Assurance Fund (the Fund). The Fund is a defined scheme which was closed to new members from January 1995; last full actuarial valuation as at 31 December 2004.
- Legal & General Group UK Senior Pension Scheme (the Scheme). The Scheme is a defined benefit scheme which, with a few exceptions (principally transfers from the Fund), was closed to new members from August 2000; last full actuarial valuation as at 31 December 2004.
- Legal & General Group Personal Pension Plan (UK) – a defined contribution scheme.
- Legal & General Staff Stakeholder Pension Scheme (UK) – a defined contribution scheme.
As the Fund and the Scheme are effectively closed to new members, under the projected unit method of valuation, the current service costs will increase as the age profile of active members rises.
In the UK, the Fund and the Scheme are multi–employer defined benefit schemes, which, as the Company’s share of the underlying assets and liabilities cannot be identified, have been treated for reporting purposes as defined contribution schemes. There was a deficit in respect of these schemes for the year ended 31 December 2006 of £174m (2005: £211m) and the contributions in respect of them for the year were £39m (2005: £31m). Further information is given in Note 40 of the consolidated IFRS financial statements of the Group.
6. Share-based payments
The Company grants share-based payments to employees of the Legal & General Group. Full disclosure of these awards is given in Note 17 in the consolidated Group IFRS financial statements. The total expense for the year relating to share awards was £15m (2005: £13m) of which £nil (2005: £nil) was retained by the Company.
7. Auditors’ remuneration
Remuneration receivable by the Company’s auditor for the audit of the Company’s financial statements is not presented. The Group consolidated financial statements disclose the aggregate remuneration receivable by the Company’s auditor for the audit of the annual accounts of the Group, which include the Company’s financial statements.
The disclosure of fees payable to the auditor and its associates for other (non-audit) services has not been made because the Group’s consolidated financial statements are required to disclose such fees on a consolidated basis.
8. Investments
| Shares
in Group companies 2006 £m |
Loans
to Group companies 2006 £m |
Total 2006 £m |
Shares in Group companies
2005 £m |
Loans to Group companies
2005 £m |
Total 2005 £m |
|
|---|---|---|---|---|---|---|
| At valuation, 1 January | 4,290 | 1,304 | 5,594 | 3,995 | 1,264 | 5,259 |
| Additions | 4 | 624 | 628 | 19 | 5 | 24 |
| Repayment | – | (606) | (606) | – | – | – |
| Revaluation | 1,114 | (40) | 1,074 | 276 | 35 | 311 |
| At valuation, 31 December | 5,408 | 1,282 | 6,690 | 4,290 | 1,304 | 5,594 |
| At cost, 31 December | 2,011 | 1,364 | 3,375 | 2,007 | 1,345 | 3,352 |
9. Derivative assets and liabilities
| Contract/ notional amount 2006 £m |
Fair values | ||
|---|---|---|---|
| Assets 2006 £m |
Liabilities 2006(1) £m |
||
| Convertible debt derivative liability | – | – | – |
| Interest rate contracts – held for trading | 400 | 17 | – |
| Interest rate contracts – fair value hedges | 405 | – | 17 |
| Forward foreign exchange contracts – held for trading | 851 | 5 | 2 |
| Derivative assets and liabilities | 22 | 19 | |
| Contract/ notional amount 2005 £m |
Fair values | ||
|---|---|---|---|
| Assets 2005 £m |
Liabilities 2005(1) £m |
||
| Convertible debt derivative liability | 525 | — | 3 |
| Interest rate contracts – held for trading | 430 | — | 3 |
| Interest rate contracts – fair value hedges | 411 | 4 | — |
| Forward foreign exchange contracts – held for trading | 727 | 12 | 3 |
| Derivative assets and liabilities | 16 | 9 | |
- 1.
- Derivative liabilities are reported in the balance sheet within other creditors and accruals.
The descriptions of each type of derivative are given in Notes 21 and 51 of the consolidated Group IFRS financial statements.
10. Other creditors and accruals
| 2006 £m |
2005 £m |
|
|---|---|---|
| Derivative liabilities (Note 9) | 19 | 9 |
| Other creditors | 2 | 6 |
| Deferred tax | – | 4 |
| Other creditors and accruals | 21 | 19 |
11. Borrowings
| Carrying
amount 2006 £m |
Coupon
rate 2006 % |
Fair value 2006 £m |
Carrying
amount 2005 £m |
Coupon rate 2005 % |
Fair value 2005 £m |
|
|---|---|---|---|---|---|---|
| Subordinated borrowings designated as equity | ||||||
| 5.875% sterling undated subordinated notes | - | - | - | 394 | 5.88 | 434 |
| Subordinated borrowings | ||||||
| 5.875% sterling undated subordinated notes | 429 | 5.88 | 411 | - | - | - |
| 4.0% Euro subordinated notes 2025 | 389 | 4.00 | 397 | 415 | 4.00 | 424 |
| Convertible bond | ||||||
| 2.75% sterling convertible bond 2006 | - | - | - | 509 | 2.75 | 521 |
| Total borrowings | 818 | 808 | 1,318 | 1,379 |
£65m of interest expense was incurred during the period (2005: £38m).
Coupon payments on both subordinated issues may be deferred if no dividend is paid on the Group’s ordinary shares. The sterling undated subordinated notes are treated as upper tier II capital for regulatory purposes and the Euro dated subordinated notes as lower tier II capital.
The Company has issued £400m of 5.875% undated subordinated notes. These notes are callable on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. As at 31 December 2005, the undated subordinated notes were classified as equity because their perpetual nature meant that in certain circumstances interest could be deferred indefinitely. On 13 March 2006, the Group entered into a supplementary deed to remove the discretionary nature of the interest. This had the effect of reclassifying the notes from equity to liability and coupon payments from distributions to interest. Upon reclassification the new debt component was recognised at fair value.
The Company has also issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% pa.
| Maturity | |||||
|---|---|---|---|---|---|
| As at 31 December 2006 | Effective
interest rate % |
Carrying
amount £m |
Within
1 year £m |
15-25
years £m |
Over
25 years £m |
| Subordinated borrowings designated as equity | |||||
| 5.875% sterling undated subordinated notes | - | - | - | - | - |
| Subordinated borrowings | |||||
| 5.875% sterling undated subordinated notes | 5.23 | 429 | - | - | 429 |
| 4.0% Euro subordinated notes 2025 | 4.12 | 389 | - | 389 | - |
| Convertible bond | |||||
| 2.75% sterling convertible bond 2006 | - | - | - | - | - |
| Total borrowings | 818 | - | 389 | 429 | |
| Maturity | |||||
|---|---|---|---|---|---|
| As at 31 December 2005 | Effective
interest rate % |
Carrying amount £m | Within
1 year £m |
15-25
years £m |
Over
25 years £m |
| Subordinated borrowings designated as equity | |||||
| 5.875% sterling undated subordinated notes | 6.03 | 394 | - | - | 394 |
| Subordinated borrowings | |||||
| 5.875% sterling undated subordinated notes | - | - | - | - | - |
| 4.0% Euro subordinated notes 2025 | 4.12 | 415 | - | 415 | - |
| Convertible bond | |||||
| 2.75% sterling convertible bond 2006 | 5.67 | 509 | 509 | - | - |
| Total borrowings | 1,318 | 509 | 415 | 394 | |
As at 31 December 2006, the Company had in place a five year £1bn syndicated committed revolving credit facility with a number of its key relationship banks. The facility also has a one year extension option at the end of 2007.
The maturity profile above is calculated on the basis that a facility to refinance a maturing loan is not recognised unless the facility and loan are related. If refinancing under the Company’s syndicated facility was recognised, then all amounts shown as repayable within one year would be reclassified as repayable between one and five years.
The effective interest rate is the rate which exactly discounts future cash payments over the life of the borrowing and will include all transaction costs and premia or discounts on issue. For the 5.875% sterling undated subordinated notes the effective rate includes the impact of reclassification of the notes from equity to debt on 13 March 2006 at fair value.
(iii) Convertible bonds
The convertible bond matured in 2006 and was redeemed at par without being converted into ordinary shares. The debt component, net of expenses, of the convertible bond recognised in the balance sheet is calculated as follows:
| 2006 £m | 2005 £m | |
|---|---|---|
| Balance at 1 January | 509 | 493 |
| Interest expense | 30 | 30 |
| Coupons paid | (14) | (14) |
| Repayment of debt | (525) | - |
| Balance at 31 December | - | 509 |
The fair value of the debt component of the convertible bond at 31 December 2005 was £517m. Interest expense on the bond was calculated using the effective rate of 5.7% on the debt component.
12. Share capital and share premium
| Authorised share capital | 2006 Number of shares |
2006 £m |
2005 £m |
|---|---|---|---|
| At 31 December: ordinary shares of 2.5p each | 9,200,000,000 | 230 | 230 |
| Issued share capital, fully paid | Number of shares | Share
capital £m |
Share
premium £m |
|---|---|---|---|
| Balance at 1 January 2006 | 6,507,421,932 | 163 | 908 |
| Options exercised under share option schemes | |||
| - Executive share option scheme | 5,324,625 | - | 4 |
| - Savings related share option scheme | 19,515,404 | - | 11 |
| Balance at 31 December 2006 | 6,532,261,961 | 163 | 923 |
| Number of shares | Share
capital £m |
Share
premium £m |
|
|---|---|---|---|
| Balance at 1 January 2005 | 6,505,959,483 | 163 | 907 |
| Options exercised under share option schemes | |||
| - Executive share option scheme | 180,628 | - | - |
| - Savings related share option scheme | 1,281,821 | - | 1 |
| Balance at 31 December 2005 | 6,507,421,932 | 163 | 908 |
Options over the ordinary share capital of the Company are disclosed in Note 17 of the consolidated Group IFRS financial statements.
13. Movement in reserves
| Hedging
reserve £m |
Share-based payment reserve £m |
Subordinated
borrowings £m |
Revaluation
reserve £m |
Profit and loss account £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Balance at 1 January 2006 | 2 | 24 | 394 | 2,317 | 838 | 3,575 |
| Retained profit after tax and dividends | - | - | - | - | 65 | 65 |
| Increase in the net assets of subsidiaries | - | - | - | 1,114 | - | 1,114 |
| Value of employee services | - | 15 | - | - | - | 15 |
| Net change in hedging reserve | (3) | - | - | - | - | (3) |
| Shares vested and transfer from share-based payments reserve | - | (12) | - | - | 2 | (10) |
| Reclassification of subordinated borrowings from equity to debt | - | - | (394) | - | - | (394) |
| Fair value loss after tax on reclassification of subordinated | ||||||
| borrowings as debt | - | - | - | - | (28) | (28) |
| Balance at 31 December 2006 | (1) | 27 | - | 3,431 | 877 | 4,334 |
| Hedging
reserve £m |
Share-based
payments reserve £m |
Subordinated
borrowings £m |
Revaluation
reserve £m |
Profit
and loss account £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Balance at 1 January 2005 | 2 | 11 | 394 | 2,041 | 501 | 2,949 |
| Retained profit after tax and dividends | - | - | - | - | 337 | 337 |
| Increase in the net assets of subsidiaries | - | - | - | 276 | - | 276 |
| Value of employee services | - | 13 | - | - | - | 13 |
| Net change in hedging reserve | - | - | - | - | - | - |
| Shares vested and transfer from share-based payments reserve | - | - | - | - | - | - |
| Reclassification of subordinated borrowings from equity to debt | - | - | - | - | - | - |
| Fair value loss after tax on reclassification of subordinated | ||||||
| borrowings as debt | - | - | - | - | - | - |
| Balance at 31 December 2005 | 2 | 24 | 394 | 2,317 | 838 | 3,575 |
14. Subsidiary undertakings
Full disclosure of the Company’s investments in subsidiary undertakings are contained within Note 47 in the consolidated Group IFRS financial statements.