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.
7. Independent auditors’ report to the members of Standard Life Aberdeen plc continued 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
Irregularities – ability to detect We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: specific areas of regulatory capital and liquidity, conduct including client assets, money laundering, market abuse regulations and certain aspects of company legislation recognising the financial and regulated nature of the group’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.
Jonathan Mills (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Saltire Court 20 Castle Terrace Edinburgh EH1 2EG 13 March 2019 116 Standard Life Aberdeen 2018
Income Investment return 3 (116) 238 Revenue from contracts with customers 4 1,955 1,486 Insurance contract premium income 31 73 89 Profit on disposal of interests in associates 1 185 319 Other income 34 33 Total income from continuing operations 2,131 2,165
(Loss)/profit before tax from continuing operations (787) 438 Tax expense attributable to continuing operations 9 43 28 (Loss)/profit for the year from continuing operations (830) 410 Profit for the year from discontinued operations 10 1,698 322 Profit for the year 868 732
From continuing operations – preference shares and perpetual notes 30 5 8 From discontinued operations – ordinary shares 30 5 25 From discontinued operations – perpetual notes 30 28 –
Earnings per share from continuing operations Basic (pence per share) 11 (29.3) 17.1 Diluted (pence per share) 11 (29.3) 17.0 Earnings per share Basic (pence per share) 11 29.1 29.8 Diluted (pence per share) 11 29.1 29.6 1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
The Notes on pages 124 to 224 are an integral part of these consolidated financial statements.
Consolidated statement of comprehensive income For the year ended 31 December 2018 restated1
Profit from discontinued operations 1,698 322 Other comprehensive income from discontinued operations 10 (43) 12 Total comprehensive income for the year from discontinued operations 1,655 334 Total comprehensive income for the year 796 670
Non-controlling interests From continuing operations – preference shares and perpetual notes 5 8 From discontinued operations – ordinary shares 5 25 From discontinued operations – perpetual notes 28 –
Adjusted profit before tax Asset management and platforms 510 – 510 417 – 417 Insurance associates and joint ventures 140 – 140 58 – 58 UK and European insurance – 210 210 – 379 379
Share of associates’ and joint ventures’ tax expense 2 (40) – (40) (41) – (41) Profit attributable to non-controlling interests – ordinary shares 2 – 5 5 – 25 25 (Loss)/profit before tax expense3 (787) 1,734 947 438 360 798 Tax (expense)/credit attributable to
3 For discontinued operations profit before tax expense attributable to equity holders consists of profit before tax of £1,780m (2017: £526m) less tax expense attributable to policyholders’ returns of £46m (2017: £166m).
Assets Intangible assets 14 3,404 4,514 Deferred acquisition costs 15 6 612 Investments in associates and joint ventures accounted for using the equity method 16 1,444 503 Investment property 17 – 9,749 Property, plant and equipment 18 61 146 Pension and other post-retirement benefit assets 35 1,111 1,099 Deferred tax assets 9 61 65 Reinsurance assets 31 – 4,811
Derivative financial assets 19 21 3,053 Equity securities and interests in pooled investment funds 19 2,030 99,020
Receivables and other financial assets 19 708 1,242 Current tax recoverable 9 6 192
Total equity 7,539 8,992 Liabilities Non-participating insurance contract liabilities 31 3 22,740 Non-participating investment contract liabilities 32 1,468 105,769 Participating contract liabilities 31 – 30,647 Deposits received from reinsurers 33 – 4,633 Third party interest in consolidated funds 33 254 16,457
Deferred tax liabilities 9 100 367 Current tax liabilities 9 23 166 Derivative financial liabilities 21 6 813 Other financial liabilities 33 1,162 3,896
Liabilities of operations held for sale 24 657 706 Total liabilities 4,978 189,119 Total equity and liabilities 12,517 198,111
The consolidated financial statements on pages 117 to 224 were approved by the Board and signed on its behalf by the following Directors: Sir Douglas Flint Bill Rattray Chairman, 13 March 2019 Chief Financial Officer, 13 March 2019 120 Standard Life Aberdeen 2018
(Loss)/profit for the year from continuing operations – – – (835) – (835) – 5 (830) Profit for the year from discontinued operations – – – 1,665 – 1,665 5 28 1,698 Other comprehensive income for the year from continuing operations – – – (44) 15 (29) – – (29) Other comprehensive income for the year from discontinued operations – – – – (43) (43) – – (43) Total comprehensive income for the year 28, 29 – – – 786 (28) 758 5 33 796 Issue of share capital 26 – – 1 – – 1 – – 1 Issue of B shares 26,29 1,000 – – – (1,000) – – – – Reclassification of perpetual debt instruments to equity 30 – – – – – – – 1,005 1,005 Repurchase of perpetual debt instruments 30 – – – – – – – (970) (970) Redemption of perpetual debt instruments 30 – – – – – – – (44) (44) Dividends paid on ordinary shares 13 – – – (634) – (634) – – (634) Dividends paid on preference shares – – – – – – – (5) (5) Coupons paid on perpetual debt instruments – – – – – – – (25) (25)
Change in operating assets 42 3,317 1,351 Change in operating liabilities 42 (2,551) (84) Adjustment for non-cash movements in investment income (80) 40 Change in unallocated divisible surplus 31 (48) 140 Other non-cash and non-operating items 42 (581) 3 Taxation paid (224) (220) Net cash flows from operating activities 826 2,194
The principal accounting policies set out in these consolidated financial statements have been consistently applied to all financial reporting periods presented.
The Group’s accounting policy for revenue within the scope of IFRS 15 has been updated to state that revenue is recognised as performance obligations are satisfied.
The standard introduces a number of new disclosure requirements which are provided in Note 4 of these financial statements. These include disclosures around:  The nature of the performance obligations within contracts with customers  Disaggregated revenue and its relationship with revenue reported for each reportable segment  Contract asset and liabilities There are no judgements that significantly affect the determination of the amount and timing of revenue from contracts with customers.
Revenue from contracts with customers from continuing operations for the year ended 31 December 2017 consists of £1,479m which was previously presented as fee income, and £7m that was previously presented as other income on the face of the consolidated income statement.
Interpretations and amendments to other standards  IFRIC 22 Foreign Currency Transactions and Advanced Consideration  Amendments to IFRS 2 Share-based payment: Classification and Measurement of Share-based payment transactions  Amendments to IAS 40 Investment Property: Transfers of Investment Property  Annual Improvements 2014-2016 cycle
As noted in (a)(i) above, the Group was eligible to defer and has opted to defer implementation of IFRS 9 in these consolidated financial statements. On 31 August 2018, the Group disposed of the UK and European insurance business (refer Note 1 for further details). Following the sale, the Group no longer has significant liabilities within the scope of IFRS 4 and is required to adopt IFRS 9 on or before 1 January 2020. The Group has adopted IFRS 9 on 1 January 2019. The Group has elected to continue applying the hedge accounting requirements of IAS 39.
At 31 December 2018, the Group also had subordinated liabilities of £1,081m. Under IFRS 9, where the terms of a financial liability are modified and the modification does not result in the derecognition of the liability, the liability is adjusted to the net present value of the future cash flows less transaction costs with a modification gain or loss recognised in the income statement. During the year ended 31 December 2018, the terms of the 4.25% US Dollar fixed rate subordinated notes were modified (refer Note 34). Consequently, on adoption of IFRS 9, these subordinated liabilities will be recognised at 1 January 2019 at a revised amortised cost of £1,086m. The impact on retained earnings will be £5m.
The Company and a number of subsidiaries adopted IFRS 9 at 1 January 2018 for their separate financial statements. The Company’s financial statements can be found in Section 9. The financial statements of UK subsidiaries which have adopted IFRS 9 including Standard Life Investments Limited, Aberdeen Asset Management PLC and Standard Life Savings Limited will be available from Companies House.
Other IFRIC 23: Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019) IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes. The Interpretation addresses issues relating to uncertain tax treatments. An uncertain tax treatment is a tax treatment for which there is uncertainty over whether the relevant tax authority will accept the tax treatment under tax law. A tax treatment is the treatment used or planned to be used in an entities income tax filings.
Intangible assets Identification and valuation of intangible assets arising from business combinations Determining the group of cash-generating units to which goodwill acquired in a business combination should be allocated
Provisions Determining whether a provision is required for separation costs Note 38 126 Standard Life Aberdeen 2018
 As a result of the disposal of the UK and European insurance business the judgements in applying the accounting policies for the classification of insurance, reinsurance and investment contracts and for the assessment of control or significant influence of structured entities are no longer considered to be critical judgements as these judgements only impact the presentation of amounts within discontinued operations. The assessment of whether the group has a contingent liability in relation to conduct matters is no longer considered to be a critical judgement.
Intangible assets Determination of useful lives Determination of the recoverable amount in relation to impairment assessment of goodwill, customer relationships and investment management contract intangibles
The following changes have been made to critical accounting estimates and assumptions as a result of the disposal of the UK and European insurance business and the acquisition of an interest in Phoenix:  We have identified estimates used in relation to the recoverable amount of investments in associates accounted for using the equity method as a critical area of estimation uncertainty
A full list of the Company’s subsidiaries is provided in Note 49.
(b) Acquisitions (b)(i) Subsidiaries On 27 April 2018, Aberdeen Asset Management Inc. purchased the US business of specialist commodity exchange traded product provider ETF Securities by purchasing the entire members’ interests of ETF Securities USA LLC, ETF Securities (US) LLC and ETF Securities Advisers LLC. The acquisition broadens Aberdeen Standard Investments’ suite of investment capabilities with the addition of a range of commodity-based Exchange Traded Funds. It also provides the platform and expertise to enable Aberdeen Standard Investments to grow its existing Smart Beta capability by launching strategies within an Exchange Traded Fund vehicle structure.
At the acquisition date the consideration, net assets acquired and resulting goodwill from the ETF Securities acquisition were as follows: Cash 27 Fair value of earn-out payment 8 Consideration 35 Fair value of net assets acquired
(b)(ii) Prior year acquisition On 6 March 2017, the boards of Standard Life plc and Aberdeen Asset Management PLC (Aberdeen) announced that they had reached agreement on the terms of a recommended merger of Standard Life and Aberdeen, through the acquisition by Standard Life of the entire issued ordinary share capital of Aberdeen, to be effected by means of a court-sanctioned scheme of arrangement between Aberdeen and Aberdeen shareholders under Part 26 of the Companies Act 2006. The merger completed on 14 August 2017 and Standard Life plc was renamed Standard Life Aberdeen plc.
Under the transaction the following businesses were retained by the Group:  UK retail platforms, including Wrap and Elevate  1825, our financial advice business In addition, the assets and liabilities of both the UK and Ireland Standard Life staff defined benefit pension plans were retained by the Group.
Total consideration received comprised cash of £2.0bn, a dividend received from SLAL of £312m in March 2018 and new shares issued at completion representing approximately 19.98% of the then issued share capital of Phoenix. The shareholding in Phoenix is subject to a lock-up of 12 months from completion. Following the announcement on 23 February 2018 the UK and European insurance business was classified as held for sale and measured at its carrying amount. The results of the UK and European insurance business to 31 August 2018 have been classified as discontinued operations. Refer Note 10. The Group recognised a gain on disposal in respect of the Sale which is included in profit from discontinued operations in the consolidated income statement for the year ended 31 December 2018.
The gain on sale was calculated as follows: £m Total assets of operations disposed of (180,444) Total liabilities of operations disposed of 179,374 Net assets of operations disposed of (1,070) Cash consideration less transaction and separation costs 1,854 Non-cash consideration – Phoenix shares 1,023 Contingent consideration 8 Deferred income (78) Release of foreign currency translation reserve 43 Gain on sale 1,780
A breakdown of the assets and liabilities disposed of is provided in Note 42(d). Refer to Note 4(b) relating to deferred income and Note 38 relating to separation costs.
The gain on sale was exempt from tax under UK tax legislation.
The following additional reserve releases were made as a result of the sale. These releases were taken directly to retained earnings.
£m Reserve arising on Group reconstruction (1,194) Merger reserve 1,290 Revaluation of owner occupied property reserve 3
(a) Basis of segmentation The Group’s reportable segments are as follows: Continuing operations: Asset management and platforms This segment primarily relates to our asset management and platform businesses. Aberdeen Standard Investments and its asset management associate in India, HDFC AMC, provide a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. The segment includes the Group’s three UK adviser platform businesses; Wrap and Elevate which are Standard Life branded, and the Parmenion digital platform; which provide administration services to advisers. The segment also includes other wholly owned activities of the Group including the 1825 financial planning and advice business, corporate centre and related activities and the UK and Ireland Standard Life staff defined benefit pension plans.
Insurance associates and joint ventures This segment comprises our life insurance associates and joint ventures in India (HDFC life), the UK (Phoenix) and China (HASL). These businesses offer a range of pension, insurance and savings products to the Indian, UK, European and Chinese markets. Phoenix is also the largest life and pensions consolidator in Europe.
Discontinued operations: UK and European insurance On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business. Refer to Note 1 for further details. As a consequence, the results of this business have been presented as discontinued operations. The UK and European insurance business provided a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
Changes to reporting segments As noted above, the segments are based on information provided to the executive committee. Previously management information was provided separately for our asset management business and our pensions and savings business. Following the completion of the sale of the UK and European insurance business, the Group is being managed as a single company and this is reflected in our new combined Asset management and platforms segment. HDFC Life and HASL, which were previously reported in the India and China life segment, are included in the Insurance associates and joint ventures segment together with Phoenix.
Tax on adjusted profit (95) – (95) (77) – (172) Share of associates’ and joint ventures' tax expense 9 (17) (26) (43) – – (43)
Restructuring and corporate transaction expenses 8 (231) (8) (239) (264) – (503) Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts2 (1,117) (38) (1,155) – – (1,155) Profit on disposal of subsidiaries 1 – – – 1,780 – 1,780 Profit on disposal of interests in associates 1 183 2 185 – – 185 Impairment of associates – (228) (228) – – (228) Investment return variances and economic assumption changes 12 – 54 54 (41) – 13
Tax on adjusting items 52 – 52 41 – 93 Share of associates’ and joint ventures’ tax expense on adjusting items 2 1 3 – – 3 Profit attributable to non-controlling interests (preference shares and perpetual notes) (5) – (5) (28) – (33) (Loss)/profit for the year attributable to equity holders of Standard Life Aberdeen plc (714) (121) (835) 1,665 – 830 Profit attributable to non-controlling interests
Ordinary shares – 5 5 Preference shares and perpetual notes 5 28 33
(Loss)/profit for the year (830) 1,698 868 1 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results of HDFC Life, HDFC AMC, Phoenix and Heng An Standard Life Insurance
Adjusted operating income relates to revenues generated from external customers with the exception of £94m (2017: £136m) included within the Asset management and platforms segment which relates to investment management fees arising from intra-group transactions with the UK and European insurance segment classified as discontinued operations. At a Group level an elimination adjustment is required to remove intra-group impacts.
Discontinued operations Eliminations Total 31 December 2017 Notes £m £m £m £m £m £m
Share of associates’ and joint ventures’ profit before tax1 41 58 99 – – 99
Tax on adjusted profit (77) – (77) (31) – (108) Share of associates’ and joint ventures' tax expense 9 (29) (12) (41) – – (41)
Profit for the year 410 322 732 1 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results HDFC Life, HDFC AMC and Heng An Standard Life Insurance Company
(b)(ii) Total income and expenses The following table provides a reconciliation of total adjusted operating income and total adjusted operating expenses, as presented in the analysis of Group adjusted profit by segment, to total revenue and total expenses respectively, as presented in the IFRS consolidated income statement: 2018 2017 Income Expenses Income Expenses £m £m £m £m
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.
Europe, Middle East and Africa 201 214 Asia Pacific 464 693
(d) Non-current non-financial assets by geographical location 2018 2017 £m £m
Interest and similar income Cash and cash equivalents 18 4 Available-for-sale debt securities 11 10
Dividend income 49 16 Gains/(losses) on financial instruments at fair value through profit or loss
Equity securities and interests in pooled investment funds (other than dividend income) (193) 225 Debt securities 2 – Derivative financial instruments (8) (9)
Foreign exchange gains/(losses) on financial instruments other than those at fair value through profit or loss 5 (8) Investment return from continuing operations (116) 238 1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
Asset management Through a number of its subsidiaries, the Group provides asset management to its customers. This performance obligation is performed over time with the revenue recognised as the obligation is performed. The Group generally receives asset management fees based on the percentage of the assets under management. The percentage varies depending on the level and nature of assets under management. Asset management fees are either deducted from assets or invoiced. Deducted fees are generally calculated, recognised and collected on a daily basis. Other asset management fees are invoiced to the customer either monthly or quarterly with receivables recognised for unpaid invoices. The payment terms for invoiced revenue vary but are typically 30 days from receipt of invoice. Accrued income is recognised to account for income earned but not yet invoiced. There is also limited use of performance fees. Performance fees are only recognised once it is highly probable that the revenue will be received.
The deferred income at 31 December 2018 relates to future services to be provided to Phoenix relating to certain client propositions.
In addition to interest expense of £5m (2017: £nil), interest expense of £45m (2017: £34m) was incurred in respect of subordinated liabilities.
Employee share-based payments and deferred fund awards 45 14 38 Total staff costs and other employee-related costs 772 781
The average number of staff employed by the Group during the year: Asset management and platforms 6,360 5,112 UK and European insurance (classified as discontinued operations)1 1,959 2,656 Total average number of staff employed 8,319 7,768 1 Includes all staff employed by the UK and European insurance business until 31 August 2018.
Information in respect of Directors’ remuneration is provided in the Directors’ remuneration report on pages 81 to 102.
8. Group financial statements continued 7. Auditors’ remuneration The following table shows the auditors’ remuneration aggregated for both continuing and discontinued operations.
During the year ended 31 December 2018 no audit fees were payable in respect of defined benefit plans to the Group’s principal auditor (2017: £nil).
8. Restructuring and corporate transaction expenses Total restructuring and corporate transaction expenses incurred from continuing operations during the year were £231m (2017: £162m). The 2018 expenses mainly relate to integration and merger related costs of £191m (2017: £109m) and a number of other business unit restructuring programmes. Deal costs relating to acquisitions included in restructuring and corporate transaction expenses for the year ended 31 December 2018 were £1m (2017: £38m). In 2017 £4m was also recognised directly in the merger reserve in equity in relation to the Aberdeen merger.
Restructuring and corporate transaction expenses of £264m (2017: £11m) are used to determine adjusted profit before tax from discontinued operations. In 2018 these expenses mainly relate to the sale of the UK and European insurance business discussed in Note 1. This includes separation costs of £53m (2017: £nil) and £198m (2017: £nil) in relation to the redemption of Tier 1 subordinated bonds. A further £80m of separation costs have been included in the gain on sale relating to contractual obligations arising from the transaction. In 2017, an additional £3m of restructuring and corporate transaction expenses were incurred by the Heritage With Profits Fund.
Current tax is the expected tax payable on taxable profit for the year.
The share of associates’ and joint ventures’ tax expense is £40m (2017: £41m) and is included in profit before tax in the consolidated income statement in ‘Share of profit from associates and joint ventures’.
Current tax recoverable and current tax liabilities at 31 December 2018 were £6m (2017: £192m) and £23m (2017: £166m) respectively. Current tax assets and liabilities at 31 December 2018 and 31 December 2017 are expected to be recoverable or payable in less than 12 months.
The standard UK corporation tax rate for the accounting period is 19%. The UK corporation tax rate will reduce to 17% from 1 April 2020. This change has been taken into account in the calculation of the UK deferred tax balance at 31 December 2018.
 The share of profit from associates and joint ventures is presented net of tax in the consolidated income statement and therefore gives rise to a reconciling item
 The impairment of the goodwill intangible asset is not tax deductible  Impairment of investment in associates is not tax deductible  Different tax rates will vary according to the level of profit subject to tax at rates different from the UK corporation tax rate (such as in our Asian business) and in 2018 mainly comprises a non-recurring reconciling item from the gain on sale made on the IPO of HDFC AMC. This arose as the Indian rate of tax on capital gains is less than the UK corporate tax rate.
 The ability to value tax losses and other tax assets also affects the tax charge. There is a non-recurring tax credit of £12m attributable to the deferred tax liability relating to intangible assets recognised from the Aberdeen merger in 2017. We have also not recognised a deferred tax asset of £10m on tax losses arising in the year due to uncertainty as to when these losses will be utilised.
Tax relating to defined benefit pension plan deficits – 10 Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss – 10 Deferred tax on net change in financial assets designated as available-for-sale (1) – Tax relating to fair value losses recognised on cash flow hedges 9 (5) Tax relating to cash flow hedge losses transferred to consolidated income statement (7) 2 Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss 1 (3) Tax relating to other comprehensive income from continuing operations 1 7 1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
Tax credit on reserves for employee share-based payments 29 – (1) Tax credit relating to coupons payable on perpetual notes classified as equity (6) (2) Tax relating to items taken directly to equity (6) (3)
Reclassified as held for sale during the year 224 – Acquired through business combinations (1) (89) Amounts credited/(charged) to the consolidated income statement 44 11 Amounts credited directly to equity in respect of employee share-based payments (2) 1 Tax on defined benefit pension plan deficits – (10) Tax on available-for-sale assets 1 – Tax on cash flow hedge (2) 3 Foreign exchange adjustment – (1) Other (1) – Net deferred tax liability at 31 December (39) (302)
Gross deferred tax liabilities 101 386 Less: Offset against deferred tax assets (1) (19) Deferred tax liabilities 100 367 Net deferred tax liability at 31 December (39) (302)
Of these unrecognised deferred tax assets, certain losses have expiry dates as follows:  US losses of £169m with expiry dates between 2027-2037  Other overseas losses of £11m with expiry dates before 2023  Other overseas losses of £3m with expiry dates between 2024 and 2028
Discontinued operations relate solely to the UK and European insurance business. The sale completed on 31 August 2018 (refer Note 1). The consolidated income statement, other comprehensive income and cash flows from discontinued operations are shown below: Consolidated income statement Notes £m £m
Expenses Insurance and participating investment contract claims and change in liabilities 1,657 3,427 Change in non-participating investment contract liabilities 1,470 8,889 Administrative expenses
Total tax expense 82 204 Less: Tax attributable to policyholders’ returns (46) (166) Tax expense attributable to equity holders 36 38 Profit for the period from discontinued operations 1,698 322
Intercompany income and expenses that will continue post completion are eliminated in discontinued operations, those that will not continue post completion are eliminated in continuing operations. Revenue from contracts with customers is shown net of elimination of intra-group revenue which will continue post completion.
The Group provides additional disclosure in relation to the total tax expense for discontinued operations. Certain products are subject to tax on policyholders’ investment returns. This tax, ‘policyholder tax’, is accounted for as an element of income tax. To make the tax expense disclosure more meaningful, we disclose policyholder tax and tax payable on equity holders’ profits separately. The policyholder tax expense is the amount payable in the period plus the movement of amounts expected to be payable in future periods by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders’ profit.
Items that will not be reclassified subsequently to profit or loss: Revaluation of owner occupied property 2 1 Total items that will not be reclassified subsequently to profit or loss 2 1
The net cash flows from investing activities for the year ended 31 December 2018 do not include cash consideration received from the disposal of the UK and European insurance business of £1,971m but includes the cash and cash equivalents of £7,472m at the date of disposal.
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.
Basic earnings per share was 29.1p (2017: 29.8p) and diluted earnings per share was 29.1p (2017: 29.6p) for the year ended 31 December 2018. The following table shows details of basic, diluted and adjusted earnings per share.
Dividend paid on preference shares (5) – (5) – – – Adjusted profit after tax attributable to equity holders of the Company 507 133 640 357 348 705
Share of associates’ and joint ventures’ tax expense on adjusting items 3 – 3 – – – Adjustment for perpetual debt instruments classified as equity net of tax – (28) (28) (8) – (8) Profit attributable to equity holders of the Company (835) 1,665 830 402 297 699
Weighted average number of ordinary shares outstanding 2,848 2,343 Dilutive effect of share options and awards 29 17 Weighted average number of diluted ordinary shares outstanding 2,877 2,360
Details of share options and awards which may be treated as dilutive are provided in Note 45. In accordance with IAS 33, no share options and awards were treated as dilutive for the year ended 31 December 2018 due to the loss attributable to equity holders of the Company from continuing operations in the year. This results in the adjusted diluted earnings per share from continuing operations and the total diluted earnings per share including discontinued operations being calculated using a weighted average number of ordinary shares of 2,848 million.
Adjusted profit before tax is the Group’s key alternative performance measure. Adjusted profit excludes the impact of the following items:  Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.  Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts  Profit or loss arising on the disposal of a subsidiary, joint venture or associate  Fair value movements in contingent consideration  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group
(a) Investment return variances and economic assumptions changes – insurance entities
The expected rates of return for debt securities and equity securities are determined separately. The expected rates of return for equity securities are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium of 3% (2017: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also use an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium of 3% (2017: 3%).
There have been no actual defaults or impairments of assets backing subordinated liabilities during the year ended 31 December 2018 or 31 December 2017. If these were to arise they would be excluded from adjusted profit.
(b) Other In the reconciliation of consolidated adjusted profit before tax to profit for the period the Other adjusting item sub-total includes (£2m) (2017: (£24m)) in relation to the impairment of a disposal group classified as held for sale and £3m (2017: (£1m)) net fair value movements in contingent consideration.
Current year final recommended dividend 14.30 345 14.30 421 1 Estimated for current year final recommended dividend.
In addition to the dividend distribution on ordinary shares, the Group returned 33.99 pence per ordinary share (£1,000m) to shareholders through a B share scheme as discussed in Note 26.
In addition to intangibles acquired through business combinations, the Group recognises as intangible assets software which has been developed internally and other purchased technology which is used in managing and executing our business. Costs to develop software internally are capitalised after the research phase and when it has been established that the project is technically feasible and the Group has both the intention and ability to use the completed asset.
Goodwill is not charged to the income statement unless it becomes impaired.
Disposals and adjustments – – – – (1) – – (1)
Accumulated amortisation and impairment At 1 January 2017 (10) – (100) (29) (178) (39) – (356) Amortisation charge for the year – (7) (68) (5) (37) (7) – (124)
1 Included in the internally developed software of £62m (2017: £156m) is £13m (2017: £53m) relating to intangible assets not yet ready for use. 2 Included in goodwill impairment losses recognised of £891m (2017: £5m) is an impairment of £880m (2017: £nil) recognised on the goodwill primarily arising from the acquisition of Aberdeen and £11m (2017: £5m) included in other administrative expenses in Note 5.
The Group’s goodwill has been acquired through a series of business combinations, most recently through the acquisitions discussed in Note 1. Of the Group’s goodwill of £2,532m (2017: £3,427m) at 31 December 2018, £2,483m (2017: £3,354m) is attributed to the Aberdeen Standard Investments group of cash-generating units, which comprises the Group’s asset management business excluding HDFC AMC, in the Asset management and platforms segment. The remaining goodwill of £49m (2017: £73m) is attributable to a number of smaller cash-generating units in the Asset management and platforms segment.
Acquisition of Aberdeen in 2017 The additions to goodwill and intangible assets acquired through business combinations during the year to 31 December 2017 related solely to the acquisition of Aberdeen. Refer Note 1. On the acquisition of Aberdeen, we identified intangible assets in relation to customer relationships, brand and technology as being separable from goodwill. Identification and valuation of intangible assets acquired in business combinations is a key judgement.
The goodwill arising on acquisition of Aberdeen was mainly attributable to expected cash flows from new customers and significant synergies which are expected to be realised. Synergies expected to be available to all market participants which impact the cash flows relating to existing Aberdeen customer relationships were included in the valuation of the customer relationships discussed below, with additional synergies forming part of goodwill.
Customer relationships The customer relationships acquired through Aberdeen were grouped where the customer groups have similar economic characteristics and similar useful economic lives. This gave rise to three separate intangible assets which we have termed Lloyds Banking Group, open ended funds, and segregated and similar.
In relation to the open ended funds we considered that it was most appropriate to recognise an intangible asset relating to customer relationships between Aberdeen and open ended fund customers, rather than an intangible asset relating to investment management agreements between Aberdeen and Aberdeen’s open ended funds. Our judgement was that the value associated with the open ended fund assets under management was predominantly derived from the underlying customer relationships, taking into account that a significant proportion of these assets under management are from institutional clients.
Carrying value £m £m Lloyds Banking Group Customer relationship with Lloyds Banking Group, including
Open ended funds Separate vehicle group – open ended investment vehicles. 11 years 223 138
The recoverable amounts are defined as the higher of fair value less costs to sell and the value in use where the value in use is based on the present value of future cashflows.
Goodwill The impairment of goodwill in 2018 includes £880m (2017: £nil) relating to an impairment of the Aberdeen Standard Investments group of cash-generating-units which is in the Asset management and platforms segment. The impairment resulted from the impact of markets and flows on future earnings expectations.
The following table shows the consequence of downside sensitivities of key assumptions on the carrying amount of the goodwill balance at 31 December 2018.
Goodwill £m Reduction in growth rate of 0.2% (93) Discount rate increased by 0.5% (231) Forecast cash flows reduced by 5% (206)
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.
Under the equity method, direct investments in associates and joint ventures are initially recognised at cost. When an interest is acquired at fair value from a third party, the value of the Group’s share of the investee’s identifiable assets and liabilities is determined applying the same valuation criteria as for a business combination at the acquisition date. This is compared to the cost of the investment in the investee. Where cost is higher the difference is identified as goodwill and the investee is initially recognised at cost which includes this component of goodwill. Where cost is lower a bargain purchase has arisen and the investee is initially recognised at the Group’s share of the investee’s identifiable assets and liabilities unless the recoverable amount for the purpose of assessing impairment is lower, in which case the investee is initially recognised at the recoverable amount.
(a) Investments in associates and joint ventures accounted for using the equity method
Reclassified from/(to) held for sale 8 – 8 (33) – (33)
The following associates are considered to be material to the Group as at 31 December 2018.
Name of associate Nature of relationship Principal place of business Measurement
Fair value of interest held by the Group at 31 December 2018 Phoenix Group Holdings plc (Phoenix) Associate United
These associates are all listed. The country of incorporation or registration is the same as their principal place of business. The interest held by the Group is the same as the proportion of voting rights held. None of the Group’s joint ventures are considered to be material to the Group as at 31 December 2018.
Phoenix HDFC Life HDFC AMC 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m
Phoenix HDFC Life HDFC AMC Other Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m
HDFC AMC HDFC AMC manages a range of mutual funds and provides portfolio management and advisory services.
The difference between the carrying value of this associate and the Group’s share of net assets is due primarily to goodwill arising on the buyback of shares by HDFC AMC from employees.
(c) Investments in joint ventures The Group has a number of joint ventures, none of which are considered material to the Group. The largest joint venture is Heng An Standard Life Insurance Company Limited (HASL). The table below provides summarised financial information for HASL. The summarised financial information reflects the amounts presented in the management accounts amended to reflect adjustments made when using the equity method.
On 25 September 2018, the Group made a US$95m (£72m) capital contribution to HASL. The Group’s interest remains at 50%.
(d) Investments in associates measured at FVTPL The aggregate fair value of associates accounted for at FVTPL included in equity securities and interests in pooled investment funds at 31 December 2018 is £34m (2017: £5,936m) none of which are considered individually material to the Group. These associates have no significant contingent liabilities to which the Group is exposed and there are no restrictions that would prevent the transfer of funds to the Group (2017: none).
The fair value of investment property can be analysed as: Freehold – 7,297 Long leasehold – 2,452 – 9,749 1 During 2017 income strips measured at £319m were reclassified as debt securities. Refer Note 41 for further details.
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.
Accumulated depreciation At 1 January 2017 – (107) (107) Depreciation charge for the year – (15) (15) Disposals and adjustments1 – 5 5
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 accounting policies for other financial investments are detailed in the separate related notes indicated below.
Equity securities and interests in pooled investment funds 39 2,030 – – – – 2,030
Receivables and other financial assets 22 8 – – – 700 708 Cash and cash equivalents 25 – – – – 1,140 1,140
Loans and receivables Total 2017 Notes £m £m £m £m £m £m
The amount of debt securities expected to be recovered or settled after more than 12 months is £423m (2017: £50,619m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
Following application of the temporary exemption granted in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments, the table below separately identifies financial assets with contractual cash flows that are solely payments of principal and interest (excluding those held for trading or managed on a fair value basis) and all other financial assets.
Estimates and assumptions Determination of the fair value of contingent consideration assets included in receivables and other financial assets is a key estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 41.
20. Loans Loans are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method, less any impairment losses.
Loans secured by mortgages 41(e) – 57 Loans and advances to banks with greater than three months to maturity from acquisition date – 32 Loans secured on policies – 2
Loans with variable rates and fixed interest rates at 31 December 2017 were £38m and £53m respectively. Loans that were expected to be recovered after more than 12 months were £60m.
In addition, at 31 December 2017, foreign exchange contracts with an aggregate notional principal amount of £8m and a net fair value liability position of less than £1m were also designated as hedges of future cash flows arising from revenue receivable in foreign currency. There were no foreign exchange contracts designated as hedges of future cash flows arising from revenue receivable in foreign currency at 31 December 2018. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2018 and 2017, the ineffectiveness recognised in the consolidated income statement arising from cash flow hedges was less than £1m.
(b) Net investment hedges Forward foreign exchange contracts with a notional principal amount of £6m (2017: £6m) and a net fair value liability position of less than £1m (2017: net fair value asset position of less than £1m) were designated as net investment hedges and gave rise to losses for the year of less than £1m (2017: gains of less than £1m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2018, the losses recognised in the consolidated income statement were less than £1m (2017: less than £1m).
Derivative financial instruments held for trading 625 8 6 160,838 3,053 780
Included in the above maturity profile are the following cash flows in relation to cash flow hedge liabilities: Within 1 year years years years
Greater than 20 years Total 2018 £m £m £m £m £m £m £m
Net cash flow hedge cash inflows 7 24 54 – – – 85
Net cash flow hedge cash inflows/(outflows) 6 21 27 (12) – – 42 22. Receivables and other financial assets 2018 2017 Notes £m £m
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.
Assets of operations held for sale Standard Life (Asia) Limited 667 703 Investment vehicles 95 91
Investments in associates accounted for using the equity method – 33 Investment and owner occupied property1 – 211 Assets held for sale 762 1,038 Liabilities of operations held for sale
Liabilities of operations held for sale 657 706 1 The 2017 balance consisted of £199m of investment property and £12m of owner occupied property.
(a) Standard Life (Asia) Limited On 29 March 2017, the Group announced the proposed sale of its wholly owned Hong Kong insurance business, Standard Life (Asia) Limited to the Group’s Chinese joint venture business, Heng An Standard Life Insurance Company Limited. Standard Life (Asia) Limited is reported in the Asset management and platforms segment and Heng An Standard Life Insurance Company Limited is reported within the Insurance associates and joint ventures segment.
Following the remeasurement of the disposal group to the lower of its carrying amount and its fair value less costs to sell, an impairment loss of £2m (2017: £24m) is included in Other administrative expenses in the consolidated income statement. Fair value has been determined by reference to the expected sale price.
(b) HDFC AMC On 30 November 2017, HDFC AMC, which is reported within the Asset management and platforms segment, announced that its board of directors had approved initiation of the process of an initial public offering (IPO) subject to receipt of necessary approvals. As a result a portion of the paid-up equity share capital of HDFC AMC was classified as held for sale at 31 December 2017. The IPO completed in August 2018. Refer Note 1 for further details.
Total cash and cash equivalents for consolidated statement of cash flows 957 9,715
(a) Issued share capital The movement in the issued ordinary share capital of the Company was: 2018 2017 Issued shares fully paid 12 2/9p each 13 61/63p each £m 12 2/9p each £m
The Company can issue shares to satisfy awards granted under employee incentive plans which have been approved by shareholders. Details of the Group’s employee plans are provided in Note 45.
(b) Return of capital 2,941,738,848 B shares were issued for nil consideration with a nominal value of 33.99 pence each on 22 October 2018, resulting in a total of £1,000m being credited to the B share capital account. At the same time £1,000m was deducted from the merger reserve. On 24 October 2018 the B shares were redeemed at 33.99 pence each. An amount of £1,000m was deducted from the B share capital account and £1,000m was transferred from retained earnings to the capital redemption reserve. The costs of the B share scheme of £2m were recognised directly in equity.
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).
Recognised in comprehensive income Recognised in profit for the year attributable to equity holders 830 699 Recognised in other comprehensive income
Remeasurement (losses)/gains on defined benefit pension plans 35 (29) (18) Share of other comprehensive income of associates and joint ventures (15) 4 Aggregate tax items recognised in other comprehensive income – (10)
Recognised directly in equity Dividends paid on ordinary shares (634) (469) Redemption of B shares 26 (1,002) – Shares bought back on-market and cancelled 26 (238) – Transfer from other reserves on disposal of subsidiaries 1 99 – Transfer between reserves on impairment of subsidiaries 29 570 – Transfer for vested employee share-based payments 68 86 Sale of shares held by trusts – 4 Reclassification of perpetual debt instruments to liability – 19 Shares distributed by employee and other trusts (33) (8) Total items recognised directly in equity (1,170) (368)
Merger reserve: the merger reserve consists of two components. Firstly at demutualisation in July 2006 the Company issued shares to former members of the mutual company. The difference between the nominal value of these shares and their issue value was recognised in the merger reserve. The reserve includes components attaching to each subsidiary that was transferred to the Company at demutualisation based on their fair value at that date. Secondly following the completion of the merger of Standard Life plc and Aberdeen Asset Management PLC on 14 August 2017, an additional amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of Aberdeen Asset Management PLC and their fair value at that date. On disposal or impairment of a subsidiary any related component of the merger reserve is released to retained earnings.
The following tables show the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.
The merger reserve includes £3,084m (2017: £4,650m) in relation to the Group’s asset management businesses. This includes £2,601m (2017: £3,877m) relating to the merger with Aberdeen. Following the impairment of the Company’s investments in its asset management entities (refer Section 9), £570m (2017: £nil) was transferred from the merger reserve to retained earnings to mitigate the impact on distributable reserves. £996m (2017: £nil) of the merger reserve relating to the asset management businesses was also utilised during the year for the issue of the B shares (refer note 26).
(a) Non-controlling interests – ordinary shares Non-controlling interests – ordinary shares of £2m were held at 31 December 2018 (2017: £289m). A reconciliation of movements during the year is provided in Note 42.
Included in non-controlling interests – ordinary shares of £289m at 31 December 2017 was non-controlling interests of Standard Life Private Equity Trust plc (SLPET) of £269m which was, prior to the sale of the UK and European insurance business, considered material to the Group. Non-controlling interests owned 44% of the voting rights of SLPET at 31 December 2017. SLPET ceased to be a subsidiary on the completion of the sale of the UK and European insurance business on 31 August 2018. The profit allocated to non-controlling interests of SLPET for the year ended 31 December 2018 is £5m (2017: £24m). Dividends paid to non-controlling interests of SLPET during the year ended 31 December 2018 were £8m (2017: £7m). The 2018 profit allocation and dividends relate to the period from 1 January 2018 to 31 August 2018 and were not material to the Group.
Summarised financial information for SLPET prior to intercompany eliminations for the year ended 31 December 2017 is provided in the following table. The summarised financial information is for the year ended 30 September 2017 which was SLPET’s 2017 financial reporting date and was considered indicative of the interest that non-controlling interests of SLPET had in the Group’s activities and cash flows. The financial statements of SLPET for the year ended 30 September 2017 were adjusted for market movements and any other significant events or transactions for the three months to 31 December 2017 for the purposes of consolidation into the Group’s consolidated financial statements for the year ended 31 December 2017.
(b) Non-controlling interests – preference shares and perpetual instruments 2018 2017 £m £m 5% 2015 Non-voting perpetual non-cumulative redeemable preference shares 99 99
On the acquisition of Aberdeen, the Group recognised preference shares and perpetual capital notes issued by Aberdeen Asset Management PLC as non-controlling interests. The profit attributable to non-controlling interests from continuing operations for the year ended 31 December 2018 totalled £5m (2017: £8m) being £5m (2017: £nil) in respect of the preference shares and £nil (2017: £8m) in respect of perpetual debt instruments. The profit attributable to non-controlling interests from discontinued operations for the year ended 31 December 2018 totalled £33m (2017: £25m) being £5m (2017: £25m) in respect of ordinary shares and £28m (2017: £nil) in respect of perpetual debt instruments.
From the date of the repayment of a £100 internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company on 30 August 2018, the perpetual subordinated guaranteed bonds and Mutual Assurance Capital Securities (MACS) issued by the Company were reclassified to equity from subordinated liabilities (see Note 34). The perpetual subordinated guaranteed bonds and MACS were recognised in equity at their fair value of the subordinated debt liabilities at 30 August 2018 of £672m and £334m respectively. The Group recognised a fair value loss of £198m on the reclassification which is included in Restructuring and corporate transaction expenses from discontinued operations (see Note 8).
The guaranteed bonds bore interest on their principal amount at 6.75% per annum payable annually in arrears on 12 July. The MACS bore interest on their principal amount at 6.546% per annum payable annually in arrears on 4 November. The coupons payable on the guaranteed bonds and MACS were tax deductible. During the year ended 31 December 2018 £7m (net of tax) (2017: £nil) was recognised directly in equity as profit attributable to non-controlling interests in relation to the coupons payable on the guaranteed bonds and MACS.
The perpetual capital notes bore interest on their principal amount at 7.0% per annum, the discretionary coupons were payable quarterly in arrears on 1 March, 1 June, 1 September and 1 December in each year. Interest accrued on any deferred payments. The coupons payable on perpetual notes were tax deductible. During the year ended 31 December 2018 £nil (2017: £8m (net of tax)) was recognised directly in equity as profit contributable to non-controlling interests in relation to the coupons payable on the perpetual capital notes.
Hybrid contracts Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts our judgement is that it is appropriate to separate the product class into the insurance element, a nonparticipating investment element and a participating investment element, so that each element is accounted for separately.
(iii) Measurement – insurance and participating investment contract liabilities For insurance contracts and participating investment contracts, IFRS 4 Insurance Contracts permits the continued application, for measurement purposes, of accounting policies that were being used at the date of transition to IFRS, except where a change is deemed to make the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable, and no less relevant to those needs. Therefore the Group applies accounting policies based on the ABI SORP as described below. As was permitted under the ABI SORP, the Group adopts local regulatory valuation methods, adjusted for consistency with asset measurement policies, for the measurement of liabilities under insurance contracts and participating investment contracts issued by overseas subsidiaries and associates.
Applying the policy noted above:  The value of participating insurance and participating investment contract liabilities on the consolidated statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts
Some participating contract liabilities arise under contracts issued by a non-participating fund with a with profits investment element then transferred to a with profits fund within SLAL that fell within the scope of the PRA’s realistic capital regime. The with profits investment element of such contracts was measured as described above. Any liability for insurance features retained in the non-participating fund was measured using the gross premium method applicable to non-participating contracts (see Section (v)).
 The recourse cash flows are recognised as they emerge as an addition to equity holders’ profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the Germany branch business, they are recognised as an addition to equity holders’ profits.
Other non-participating insurance contracts are measured using the gross premium method. In general terms, a gross premium valuation basis is one in which the premiums brought into account are the full amounts receivable under the contract. The method includes explicit estimates of premiums, expected claims and costs of maintaining contracts. Cash flows are discounted at the valuation rate of interest determined to reflect conditions at the reporting date in accordance with Prudential Regulation Authority (PRA) requirements that existed at 31 December 2015.
UK Associates – Phoenix Non-participating insurance contract liabilities are measured, for equity accounting purposes, at best estimate with an explicit margin for prudence with the process used to determine assumptions based on Solvency II data. The valuation interest rate is a risk free rate (swap curve plus 10 bps) with an explicit adjustment for illiquidity in respect of assets backing illiquid liabilities. Demographic assumptions are based on a best estimate with an explicit margin for demographic risks.
(vii) Reinsurance contracts Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that did not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for in a manner consistent with financial instruments.
Contracts that gave rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contained an element that did not transfer significant insurance risk and which could be measured separately from the insurance component. Where such elements are present, they are accounted for separately with any deposit element being accounted for in a manner consistent with financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as reinsurance contracts.
Gross earned premium 75 91 Premium ceded to reinsurers (2) (2) Insurance contract premium income from continuing operations 73 89 1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
(c) Insurance and participating investment contract liabilities 2018 2017 £m £m
Non-participating insurance contract liabilities 3 22,740 Participating contract liabilities: Participating insurance contract liabilities – 14,659 Participating investment contract liabilities – 15,313 Unallocated divisible surplus – 675 Participating contract liabilities – 30,647
Total insurance and participating contract liabilities Reinsurance contracts Net 2017 £m £m £m £m £m £m
Reclassified as held for sale during the year (675) – Change in UDS recognised in the consolidated income statement – 140 Change in UDS recognised in other comprehensive income – (12) Foreign exchange adjustment – (38) At 31 December – 675
(f) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 39. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
Contributions received on non-participating investment contracts are treated as policyholder deposits and not reported as revenue in the consolidated income statement.
Investment return and related benefits credited in respect of non-participating investment contracts are recognised in the consolidated income statement as changes in investment contract liabilities.
Management determines the classification of financial liabilities at initial recognition. Financial liabilities are designated as at FVTPL when they are managed and their performance evaluated on a fair value basis. The methods and assumptions used to determine fair value of financial liabilities designated at FVTPL are discussed in Note 41. Financial liabilities which are not derivatives and not FVTPL are measured at amortised cost.
Financial liabilities measured at amortised cost Total 2018 Notes £m £m £m £m £m Non-participating investment contract liabilities 39 1,468 – – – 1,468 Third party interest in consolidated funds 39 254 – – – 254
Subordinated guaranteed bonds 6.75% Sterling fixed rate perpetual – – £500m £502m
A description of the key features of the Group’s subordinated liabilities as at 31 December 2018 is as follows: 4.25% US Dollar fixed rate1,2
During the year to 31 December 2018, the Group redeemed/repurchased subordinated liabilities with the following key features 7% US Dollar fixed rate 6.75% Sterling fixed rate 6.546% Sterling fixed rate
The Group operates two types of pension plans:  Defined benefit plans which provide pension payments upon retirement to members as defined by the plan rules. All of the Group’s defined benefit plans, with the exception of a small plan in Ireland, are closed to future service accrual.
For the principal defined benefit plan (UK Standard Life Group plan), the Group considers that it has an unconditional right to a refund of a surplus, assuming the gradual settlement of the plan liabilities over time until all members have left the plan. The plan trustees can purchase annuities to insure member benefits and can, for the majority of benefits, transfer these annuities to members. The trustees cannot unconditionally wind up the plan or use the surplus to enhance member benefits without employer consent. Our judgement is that these trustee rights do not prevent us from recognising an unconditional right to a refund and therefore a surplus.
For defined contribution plans, the Group pays contributions to separately administered pension plans. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised in current service cost in the consolidated income statement as staff costs and other employee-related costs when they are due.
While the IAS 19 valuation reflects a best estimate of the financial position of the plan, the funding valuation reflects a prudent estimate. There is no material difference in how assets are measured. The funding measure of liabilities (‘technical provisions’) and the IAS 19 measure are materially different. The key differences are the discount rate and inflation assumptions. While IAS 19 requires that the discount rate reflect corporate bond yields, the funding measure discount rate reflects a prudent estimate of future investment returns based on the actual investment strategy. The funding valuation adopts a market consistent measure of inflation without any adjustment. The IAS 19 assumption incorporates an adjustment to remove the inflation risk premium believed to exist within market prices.
Following a High Court ruling against a third party’s pension scheme, that requires that scheme to address the inequalities in the statutory benefits paid to men and women, an allowance for assumed equalisation has been introduced for our principal defined benefit plan at 31 December 2018. The estimated impact is recognised as a past service cost, though is not material.
At the last trustee valuation, effective 1 January 2016, the plan was 70% funded on an ongoing basis.
(a) Analysis of amounts recognised in the consolidated income statement The amounts recognised in the consolidated income statement for defined contribution and defined benefit plans are as follows: restated1 £m £m
Contributions to defined benefit plans in the year ended 31 December 2018 were £37m (2017: £12m). Expected contributions to defined benefit plans in 2019 are £18m and are not expected to materially change over the next three to five years. These include £33m in 2018 and £15m contributions expected in 2019 to Aberdeen UK plans and the Ireland Standard Life plan in respect of deficit funding agreed with the trustees. The current deficit on these plans is £35m.
Effect of limit on plan surpluses Total 2018 £m £m £m £m £m
Total (expense)/income recognised in consolidated income statement (67) 122 55 (19) 36 Remeasurements
Total (expense)/income recognised in consolidated income statement (90) 128 38 (16) 22 Remeasurements
Change in effect of limit on plan surplus – – – 51 51
Remeasurement (losses)/gains recognised in other comprehensive income (138) 69 (69) 51 (18)
The distribution of the fair value of the assets of the Group’s funded defined benefit plans is as follows: £m £m £m £m £m £m
Total assets measured at fair value based on level 1 inputs 3,364 3,711 212 184 3,576 3,895 Assets measured at fair value based on level 2 or 3 inputs Derivatives 289 334 (6) – 283 334
(e) Estimates and assumptions Determination of the valuation of principal plan liabilities is a key estimate as a result of the assumptions made relating to both economic and non-economic factors. The key economic assumptions for the principal plan, which are based in part on current market conditions, are shown below: Discount rate 2.85 2.60 Rates of inflation
Consumer Price Index (CPI) 2.20 2.20 Retail Price Index (RPI) 3.20 3.20
Asset volatility Investment strategy risks include underperformance of the absolute return strategy and underperformance of the liability hedging strategy. As the trustees set investment strategy to protect their own view of plan strength (not the IAS 19 position), changes in the IAS 19 liabilities (e.g. due to movements in corporate bond prices) may not always result in a similar movement in plan assets.
The principal plan uses both bonds and derivatives to hedge out inflation risks on the plan’s funding basis, rather than the IAS 19 basis, which is expected to minimise the plan’s need to rely on support from the Group.
(g)(ii) Sensitivity to key assumptions The sensitivity of the principal plan’s obligation and assets to the key assumptions is disclosed below.
Yield/discount rate Decrease by 1% (e.g. from 2.85% to 1.85%) (729) 1,534 (861) 1,634
Life expectancy Decrease by 1 year 73 – 56 – Increase by 1 year (68) – (52) –
1 Comparatives for 2017 sensitivities have been restated to be comparable with refined 2018 methodology.
Where the Group receives fees in advance (front-end fees) for services it is providing, including investment management services, these fees are initially recognised as a deferred income liability and released to the consolidated income statement over the period services are provided.
The amount of deferred income expected to be settled after more than 12 months is £67m (2017: £115m).
Amounts payable on direct insurance business – 318 Amounts payable on reinsurance contracts – 5 Outstanding purchases of investment securities 2 194
Accruals includes £5m (2017: £6m) relating to contracts with customers (see note 4(b)).
The amount of provisions expected to be settled after more than 12 months is £72m (2017: £102m).
Risk segments The assets and liabilities on the Group’s consolidated statement of financial position can be split into three categories (risk segments) which give the shareholder different exposures to the risks listed previously. These categories are: Shareholder business Shareholder business refers to the assets and liabilities to which the shareholder is directly exposed. For the purposes of this note, the shareholder refers to the equity holders of the Company and the preference shareholders.
Unit linked funds Unit linked funds refers to the assets and liabilities of the unit linked funds of the life operations of the Group. It does not include the cash flows (such as asset management charges or investment expenses) arising from the unit linked fund contracts. Such cash flows are included in shareholder business.
The following table sets out the link between the reportable segments set out in Note 2 and the risk segments.
Risk segment Reportable segment Shareholder business Participating business Unit linked funds1
The table below sets out how the shareholder is exposed to market, credit, and liquidity risk at the reporting date, arising from the assets and liabilities of the three risk segments: Risk Shareholder business Unit linked funds Third party interests in consolidated funds and non-controlling interests (TPICF & NCI)
Market The shareholder is directly exposed to the impact of movements in equity and property prices, interest rates and foreign exchange rates on the value of assets held by the shareholder business.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are borne by the policyholder. The shareholder’s exposure arises from the changes in the value of future fee based revenue earned on unit linked funds due to market movements.
Prior to the sale of the UK and European insurance business, the Group had significant direct exposure to demographic risks, in particular persistency risk and longevity risk. Following the sale, the Group’s exposure to demographic risk is largely limited to its defined benefit pension plans and is no longer considered a key risk. The risks relating to the Group’s defined benefit pension plans are explained in Note 35.
The shareholder is exposed to operational, conduct, regulatory and legal, and strategic risks arising across the three risk segments and any losses incurred are typically borne by the shareholder.
(a)(ii) Consolidated financial position by risk segment The table that follows provides an analysis of the consolidated statement of financial position showing the Group’s assets and liabilities by risk segment. This categorisation has been used to present the information in this note.
Following the sale of the UK and European insurance business the Group no longer has a participating business risk segment and the financial instrument exposures in the shareholder business, unit linked funds, and third party interest in consolidated funds and non-controlling interests risk segments have significantly reduced.
business Participating business Unit linked funds TPICF & NCI1 Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m
Pension and other post-retirement benefit assets 1,111 1,099 – – – – – – 1,111 1,099
At available-for-sale 862 856 – – – – – – 862 856 Receivables and other financial assets 695 697 – 70 11 366 2 109 708 1,242
Net inter-segment assets/(liabilities) (3) 275 – (274) 1 5 2 (6) – –
(b) Market risk As described in the table on page 188, the shareholder is exposed to market risk and as a result the following quantitative market risk disclosures are provided in respect of the financial assets of the shareholder business.
The Group manages market risks through the use of a number of controls and techniques which are discussed in the following section.
Information on the methods used to determine fair values for each major category of financial instrument measured at fair value is presented in Note 41.
(b)(i)(i) Group exposure to equity risk The Group is exposed to the risk of adverse equity market movements which could result in losses. This applies to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk:  Direct equity shareholdings in the shareholder business and the Group’s defined benefit pension plans  The indirect impact from changes in the value of equities held in funds from which management charges are taken Exposures to equity securities are primarily controlled through the limits imposed on the amount of seed capital and co-investment activity that may be undertaken.
In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £464m (2017: £204m). The shareholder exposure to interests in pooled investment funds primarily relates to:  Co-investment holdings in property and infrastructure funds of £37m (2017: £56m)  Investments in certain Aberdeen managed funds to hedge against liabilities from variable pay awards that are deferred and settled in cash by reference to the share price of those funds of £53m (2017: £57m)  Seed capital in funds which are not consolidated of £57m (2017: £73m)  Holdings in cash funds which are not consolidated of £30m (2017: £5m)  Corporate funds held in absolute return funds which are not consolidated of £252m (2017: £nil)
(b)(i)(iii) Group exposure to foreign currency risk The Group’s financial assets are generally held in the local currency of its operational geographic locations, principally to assist with the matching of liabilities. However, foreign currency risk arises where adverse movements in currency exchange rates impact the value of revenues received from, and the value of assets and liabilities held in, currencies other than the local currency. The Group manages this risk through the use of limits on the amount of foreign currency risk that is permitted.
The table below summarise the shareholder businesses’ exposure to foreign currency risks in Sterling. The table exclude inter-segment assets and liabilities.
Other currencies Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Other currencies include assets of £13m (2017: £5m) and liabilities of £3m (2017: £36m) in relation to the fair value of derivatives used to manage currency risk.
The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries, joint ventures and associates accounted for using the equity method. On 18 October 2017, the Group issued US dollar subordinated notes with a principal amount of US$750m. The related cash flows expose the Group to foreign currency risk on the principal and coupons payable. The Group manages the foreign exchange risk with a cross-currency swap which is designated as a cash flow hedge.
During 2018 the Group reaffirmed its strategy for hedging foreign currency risks, providing a consistent approach to managing these risks. The Group generally does not hedge the currency exposure relating to revenue and expenditure, nor does it hedge translation of overseas profits in the income statement. Where appropriate, the Group may use derivative contracts to reduce or eliminate currency risk arising from individual transactions or seed capital and co-investment activity.
Unit linked funds Changes in equity security and property prices and/or fluctuations in interest rates will affect unit linked liabilities and the associated assets by the same amount. Therefore, the change in unit linked liabilities and the corresponding asset movement has not been presented.
Limitations The sensitivity of the Group’s profit after tax and equity is non-linear and larger or smaller impacts should not be derived from these results.
For each sensitivity ‘test’, the impact of a reasonably possible change in a single sensitivity factor is presented, while the other sensitivity factors remain unchanged. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.
Profit after tax and equity sensitivity to price risk. The impact of the following price risk assumptions on profit and equity, net of tax, are as follows: Impact on profit after tax1 and on equity £m £m
Change in equity security prices +10% 16 13 1 A positive number for impact on profit after tax represents a credit to the consolidated income statement.
The sensitivity of the Group’s total equity to variations in equity securities prices is the same as the sensitivity of the Group’s profit after tax.
Profit after tax and equity sensitivity to interest rate risk. The impact of the following interest rate assumptions on profit and equity, net of tax, are as follows: Impact on profit after tax1 Impact on equity 2018 2017 2018 2017 £m £m £m £m
(c) Credit risk As described in the table on page 188, the shareholder is exposed to credit risk and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets held.
Quantitative credit risk disclosures are not provided in respect of the assets of the unit linked funds since the shareholder is not directly exposed to credit risk from these assets.
The Group’s credit risk exposure mainly arises from its holdings in financial instruments. Exposures to credit risk and concentrations of credit risk are managed by setting exposure limits for different types of financial instruments and counterparties. The limits are established using the following controls: Financial instrument with credit risk exposure Control Cash and cash equivalents Maximum counterparty exposure limits are set with reference to internal credit assessments. Derivative financial instruments Maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. Refer to Section (c)(ii) for further details on collateral.
Debt securities The Group’s policy is to set exposure limits by name of issuer, sector and credit rating. Other financial instruments Appropriate limits are set for other financial instruments to which the Group may have exposure at certain times, for example commission terms paid to intermediaries.
(c)(i) Credit exposure Assets are deemed to be past due when a counterparty has failed to make a payment when contractually due.
Shareholder business An analysis of financial and reinsurance assets by credit rating is as follows: Reinsurance assets Loans Derivative financial assets Debt securities
Internally rated – – – – – – – 1,184 – – – – – 1,184
At 31 December 2018, receivables and other financial assets of £21m (2017: £19m) were past due by less than three months and £1m (2017: £2m) were past due by three to six months and £4m (2017: £3m) were past due by six to twelve months.
(c)(ii) Collateral accepted and pledged in respect of financial instruments Collateral in respect of bilateral over-the-counter (OTC) derivative financial instruments and bilateral repurchase agreements is accepted from and provided to certain market counterparties to mitigate counterparty risk in the event of default. The use of collateral in respect of these instruments is governed by formal bilateral agreements between the parties. For OTC derivatives the amount of collateral required by either party is determined by the daily bilateral OTC exposure calculations in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Under the terms of these agreements, collateral is posted with the ownership captured under title transfer of the contract. With regard to either collateral pledged or accepted, the Group may request the return of, or be required to return, collateral to the extent it differs from that required under the daily bilateral OTC exposure calculations.
Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 31 December 2018, the Group had pledged £8m (2017: £46m) of cash and £nil (2017: £103m) of securities as collateral for derivative financial liabilities. At 31 December 2018, the Group had accepted £21m (2017: £1,501m) of cash and £50m (2017: £947m) of securities as collateral for derivatives financial assets and reverse repurchase agreements. None of the securities were sold or repledged at the year end.
Related amounts not offset on the consolidated statement of financial position
(d) Liquidity risk As described in the table on page 188, the shareholder is exposed to liquidity risk from shareholder business and unit linked funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.
Periodic investigations are undertaken into liquidity requirements, which include consideration of cash flows in normal conditions, as well as investigation of scenarios where cash flows differ markedly from those expected.
Liquidity risk is managed by each business unit in consultation with the Group Treasury function and each business unit is responsible for the definition and management of its contingency funding plan.
Unit linked funds Non-participating investment contract liabilities 1,468 105,765 – – – – – – – – – – 1,468 105,765 196 Standard Life Aberdeen 2018
The principal amounts of financial liabilities where the counterparty has no right to repayment are excluded from the above analysis along with interest payments on such instruments after 20 years.
Refer Note 21 for the maturity profile of undiscounted cash flows of derivative financial instruments.
The Group also had unrecognised commitments in respect of financial instruments as at 31 December 2018 with a contractual maturity of within one year and between one and five years of £9m and £28m respectively (2017: £411m and £36m).
The Group conduct and operational risk policy framework is used to support the management of operational risks. Business units adopt the relevant minimum standards contained within these policies and are required to manage risk in accordance with the policies, taking mitigating action as appropriate to operate within appetites.
The operational risks faced by each business unit and its exposure to these risks forms its operational risk profile. Each business unit is required to understand and review its profile based on a combination of the estimated impact and likelihood of risk events occurring in the future, the results of RCSA and a review of risk exposures relative to approved limits.
(f) Conduct risk The Group defines conduct risk as the risk that through our behaviours, strategies, decisions and actions the Group delivers unfair outcomes to our customers/clients and/or poor market conduct. Conduct risk can occur across multiple areas and from multiple sources, including the crystallisation of an operational risk.
(g) Regulatory and legal risk The Group defines regulatory and legal risk as the risk of regulatory or legal sanction, reputational damage or financial consequences as a result of a failure to comply with, or adequately allow for changes in, all applicable laws and legislation, contractual requirements or regulations in any of the countries in which the Group operates.
(h) Strategic risk The Group defines strategic risk as those risks which threaten the achievement of the strategy through poor strategic decision-making, implementation or response to changing circumstances. Strategic risks are considered across the Group through the business planning process. The strategic risks to which the Group is exposed are reviewed on a regular basis.
(a) Consolidated structured entities As at 31 December 2018 and 31 December 2017, the Group has not provided any non-contractual financial or other support to any consolidated structured entity and there are no current intentions to do so.
Shareholder business Participating business Unit linked funds TPICF & NCI1 Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m
The total issuance balance relating to unconsolidated structured debt securitisation vehicles in which the Group has an investment is £1,000m (2017: £59,169m).
8. Group financial statements continued 41. Fair value of assets and liabilities
Estimates and assumptions Determination of the fair value of contingent consideration assets and liabilities is a key estimate. Further details on the methods and assumptions used to value these assets and liabilities, and sensitivities to those assumptions, are set out in Section (d) below.
(c) Non-financial investments An analysis of the Group’s investment property and owner occupied property within property, plant and equipment in accordance with IAS 40 Investment property and IAS 16 Property, plant and equipment is presented in Notes 17 and 18 respectively and includes those assets held at fair value.
(d) Methods and assumptions used to determine fair value of assets and liabilities including those held for sale Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given below. These methods and assumptions include those used to fair value assets and liabilities held for sale, including the individual assets and liabilities of operations held for sale.
Unlisted equities are valued using an adjusted net asset value. The Group’s exposure to unlisted equity securities primarily relates to private equity investments, real estate funds and infrastructure funds. The majority of the Group’s private equity investments are carried out through European fund of funds structures, where the Group receives valuations from the investment managers of the underlying funds.
Where pooled investment funds have been seeded and the investment in the funds have been classified as held for sale, the costs to sell are assumed to be negligible. The fair value of pooled investment funds including those held for sale is calculated as equal to the observable unit price.
Investment property and owner occupied property The fair value of investment property and all owner occupied property is based on valuations provided by external property valuation experts. The fair value of investment property is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. No adjustment has been made for vacant possession for the Group’s owner occupied property.
In the UK and Europe, valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RICS) valuation standards. These are predominantly produced using an income capitalisation approach. The income capitalisation approach is based on capitalising an annual net income stream using an appropriate yield. The annual net income is based on both current and estimated future net income. The yield and future net income used is determined by considering recent transactions involving property with similar characteristics to the property being valued. Where it is not possible to use an income capitalisation approach, for example on property with no rental income, a market comparison approach is used by considering recent transactions involving property with similar characteristics to the property being valued. In both approaches where appropriate, adjustments will be made by the valuer to reflect differences between the characteristics of the property being valued and the recent market transactions considered.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2018 and 31 December 2017, the residual credit risk is considered immaterial and no credit risk adjustment has been made.
 Corporate bonds listed or quoted in an established over-the-counter market including asset-backed securities These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote, the instruments are categorised as level 3 instruments. For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy.
The valuation technique used by the Group to value these instruments is an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. Unlike, investment properties which typically are leased on shorter lease terms, the estimated rental value is not a significant unobservable input. This is due to the length of the lease together with the nature of the rent reviews where the annual rental increases over the term of the lease in line with inflation or fixed increases. As the income capitalisation valuations generally include significant unobservable inputs including unobservable adjustments to the yield observed in other income strip transactions, these assets are categorised as level 3 in the fair value hierarchy.
Contingent consideration assets and contingent consideration liabilities Contingent consideration assets and liabilities have been recognised in respect of acquisitions and disposals. Generally valuations are based on unobservable assumptions regarding the probability weighted cash flows and, where relevant, discount rate and therefore the assets and liabilities are classified as level 3 in the fair value hierarchy. Significant contingent consideration arises under the terms of the sale of SLAL to Phoenix in August 2018. The terms include a number of indemnities that give rise to contingent consideration. The indemnities that have the most significant impact on the fair value of this contingent consideration are as follows: Annuity sales practices: The annuity sales practices indemnity primarily relates to enhanced annuities. At the request of the FCA, SLAL is conducting a review of non-advised annuity sales (with a purchase price above a minimum threshold) to customers eligible to receive an enhanced annuity from 1 July 2008 until 31 May 2016. The purpose of this review is to identify whether these customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and, where appropriate, provide redress to customers who have suffered loss as a result of not having received sufficient information. SLAL continues to work with the FCA regarding the process for conducting this past business review.
The technique used to value this element of the contingent consideration is to assess the likelihood of an over or under utilisation of the 31 December 2017 provision. The likelihood of a receipt of recoveries from the related insurance policies is also considered. Finally the likelihood of a payment related to any financial penalty has been considered. (Refer 41(d)(iv) for further details.)
Brexit recapitalisation: The Group shall pay to Phoenix an amount related to any additional capital, in excess of an agreed amount, that is required to be contributed to Standard Life International Designated Activity Company (SLIDAC) in respect of the transfer of certain German and Irish branch businesses of SLAL to SLIDAC pursuant to Brexit-related transfers. This payment is subject to a cap of £50m.
There were no significant transfers between levels 1 and 2 during the year (2017: none). Refer Note 41(d)(iii) for details of movements in level 3.
Non-participating investment contract liabilities 1,468 105,765 52 62 1,520 105,827 – – 1,520 105,827 – – Liabilities in respect of third party interest in consolidated funds 254 16,457 14 28 268 16,485 – – 268 15,187 – 1,298
Settlement – – – – – – – – – 75
Transfers in to level 32 – – – – – 8 – 27 – – Transfers out of level 32 – – – – – (7) – (42) – – Transfers between investment property and owner occupied property – (17) – 17 – – – – – – Foreign exchange adjustment – 11 – – – (13) – – – – Total gains recognised on revaluation of owner occupied property within other comprehensive income – – – 1 – – – – – –
1 During 2017 income strips measured at £319m which were previously included within investment property were reclassified as debt securities to reflect the underlying nature of these instruments. 2 Transfers are deemed to have occurred at the end of the calendar quarter in which they arose.
(d)(iv) Significant unobservable inputs in level 3 instrument valuations The table below identifies the significant unobservable inputs used in determining the fair value of level 3 instruments at 31 December 2018: Fair value 2018 £m Unobservable input Input used Equity securities and interests in pooled investment funds 59 This comprises holdings in approximately 80 separate funds, predominantly by value being interests in real estate, infrastructure and private equity funds. Given the numerous unobservable inputs pertaining to the valuation of the underlying assets in the funds no individual unobservable inputs are considered significant.
Estimates and assumptions The contingent consideration related to the annuity sales practices indemnity is considered to be an item for which assumptions and other sources of estimation uncertainty within the valuation technique 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.
The valuation of the contingent consideration in relation to this indemnity takes into account our view of the need for any changes in the provision held by SLAL. At 31 December 2018 SLAL has not increased or released any element of the provision that it recognised at 31 December 2017. This reflects the view that the overall level of the provision at 31 December 2017 remains appropriate and therefore that the fair value of this component of the contingent consideration, before considering insurance recoveries and potential FCA-levied penalties, is not material. The valuation technique and underpinning assumptions are as follows: The key assumptions underlying the provision for annuity sales practices relating to enhanced annuities are:  The number of customers entitled to redress  The amount of redress payable per customer  The costs of conducting the review
The number of customers entitled to redress has been estimated based on:  The number of customers in the review population  The estimated percentage of these customers eligible for an enhanced annuity  The estimated percentage of these eligible customers that did not receive sufficient information from SLAL about enhanced annuities
The FCA thematic review noted, for the industry as a whole, a plausible range of lost income for customers who were entitled to enhanced annuities but purchased standard annuities to be between £120 and £240 per annum for an average annuity purchase price of £25,000.
Assumptions relating to future annuity payments are consistent with SLAL’s other annuity reserving assumptions.
In addition, the fair value of the contingent consideration has taken into account that substantially all of the £100m being sought by SLAL under insurance policies to mitigate the financial impact was received by the Group in January 2019 and has been based on an assessment of the likelihood of a financial penalty and the FCA’s methodology for calculating such penalties.
The table below identifies the significant unobservable inputs used in determining the fair value of level 3 instruments at 31 December 2017 and quantifies the range of these inputs used in the valuation at that reporting date: Fair value 2017 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 9,571 Income capitalisation Equivalent yield Estimated rental value per square metre per annum
402 Income capitalisation Equivalent yield Estimated rental value per room per annum
1 An adjustment is made to the valuations of private equity investments received from the investment managers of the underlying funds to estimate the effect of changes in market conditions between the date of their valuations and the end of the reporting period using market indices. The adjustment made at 31 December 2018 was £nil (2017: £nil).
Prior to the disposal of SLAL the shareholder was directly exposed to movements in the value of level 3 instruments held by the shareholder business (to the extent they were offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 instruments held by the participating business and unit linked funds risk segments were offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder was not directly exposed to such movements unless they were sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders. Movements in level 3 instruments held in the TPICF and NCI risk segment were offset by opposite movements in the liabilities in respect of third party interest in consolidated funds and in equity attributable to non-controlling interest and therefore the shareholder was not directly exposed to such movements.
As recognised in the consolidated statement of financial position line item Fair value Level 1 Level 2 Level 3 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Notes £m £m £m £m £m £m £m £m £m £m
Assets Loans secured by mortgages 20 – 57 – 64 – – – 64 – – Liabilities Non-participating investment contract liabilities 33 – 4 – 4 – – – – – 4
42. Statement of cash flows The tables below provide further analysis of the balances in the statement of cash flows.
Investment property (303) (373) Equity securities and interests in pooled investment funds 1,369 (6,958) Debt securities 3,142 7,279 Derivative financial instruments 269 305 Reinsurance assets 328 568 Investments in associates and joint ventures accounted for using the equity method 44 21 Receivables and other financial assets and other assets (1,796) 211 Deferred acquisition costs (13) 30
Assets held for sale 250 62 Change in operating assets 3,317 1,351
Other financial liabilities, provisions and other liabilities 1,260 (897) Deposits received from reinsurers (397) (460) Pension and other post-retirement benefit provisions (7) (33) Deferred income 57 (41) Insurance contract liabilities (586) (1,090) Investment contract liabilities (2,756) 1,853 Change in liability for third party interest in consolidated funds (46) 480 Liabilities held for sale (76) 104 Change in operating liabilities (2,551) (84)
(e) Movement in non-controlling interests – ordinary shares and third party interest in consolidated funds arising from financing activities
The following table reconciles the movement in non-controlling interests and third party interests in consolidated funds in the year, split between cash and non-cash items.
Net settlements of units by third parties – (507) (507) (5) (1,006) (1,011)
Cash flows from financing activities (9) (567) (576) (12) (1,108) (1,120) Non-cash items
Foreign exchange differences on translating foreign operations – 28 28 – (54) (54) Profit in the year attributable to non-controlling interests – ordinary shares 5 – 5 25 – 25 Change in liability for third party interest in consolidated funds – (37) (37) – 1,124 1,124 Movements arising from changes in control of subsidiaries and other non-cash movements (281) (15,474) (15,755) (1) (157) (158)
Amounts reclassified from equity – 380 Amounts reclassified to equity (803) – Interest expense 91 88
(b) Unrecognised financial instruments The Group has committed £37m (2017: £447m) in respect of unrecognised financial instruments to customers and third parties. Of this amount £nil (2017: £360m) is committed by consolidated private equity funds. These commitments will be funded through contractually agreed additional investments both by the Group, through its controlling interests, and the funds’ non-controlling interests. The level of funding provided by each will not necessarily be in line with the current ownership profile of the funds.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows: restated1 £m £m
Not later than one year 39 37 Later than one year and no later than five years 109 90 Later than five years 102 61 Total operating lease commitments 250 188 1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
(ii) Annual bonus deferred share options The Group operates the following deferred bonus plans which award share options.
Remaining contractual life of options outstanding (years)1 1.96 1.38 7.10 2.65 2.06 1.63 10.36 2.84 1 Weighted average.
Share price at grant date1 362p 335p 359p 261p Fair value at grant date1 362p 335p 359p 14p Exercise price Nil Nil Nil 256p-257p
Share options granted under long-term incentive plans – 19 Share options granted under Sharesave 2 1 Share options and share awards granted under deferred bonus plans 33 18 Matching shares granted under share incentive plans 1 1 Equity-settled share-based payments 36 39 Cash-settled share-based payments – 1 Cash-settled deferred fund awards 9 10 Total expense 45 50
Included in the expense above is £31m (2017: £12m) of share-based payment expenses which are included in restructuring and corporate transaction expenses in the consolidated income statement.
The liability for cash-settled share-based payments outstanding at 31 December 2018 is £2m (2017: £3m).
Deferred fund awards At 31 December 2018, the liability recognised for cash-settled deferred awards was £48m (2017: £52m). The total intrinsic value of unvested awards at 31 December 2018 was £31m (2017: £31m).
46. Related party transactions (a) Transactions and balances with related parties In the normal course of business, the Group enters into transactions with related parties that relate to insurance and investment management business.
In the year ended 31 December 2018, for associates accounted for using the equity method, the Group recognised sales primarily in relation to management fees of £89m (2017: £nil) and purchases in relation to services received of £28m (2017: £nil).
There were no sales to or purchases from joint ventures during the year ended 31 December 2018 (2017: none).
In addition to these transactions between the Group and related parties during the year, in the normal course of business the Group made a number of investments into/divestments from investment vehicles managed by the Group including investment vehicles which are classified as investments in associates measured at FVTPL. Group entities paid amounts for the issue of shares or units and received amounts for the cancellation of shares or units.
Certain members of key management personnel hold investments in investments products which are managed by the Group. None of the amounts concerned are material in the context of funds managed by the Group. All transactions between key management and their close family members and the Group during the year are on terms which are equivalent to those available to all employees of the Group.
47. Capital management (a) Capital and risk management policies and objectives Managing capital is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Board considers our key stakeholders to be our clients, the providers of capital (our equity holders and holders of our subordinated liabilities) and the Financial Conduct Authority (FCA) as the lead prudential supervisor for the Group.
Stress testing is completed to determine the appropriate level of regulatory capital and liquidity that the Group must hold, with results shared with the FCA at least annually. In addition, the Group monitors a range of capital and liquidity statistics on a daily, monthly or less frequent basis as required. Surplus capital levels are forecast, taking account of projected dividends and investment requirements, to ensure that appropriate levels of capital resources are maintained.
The Group is required to hold capital resources to cover both Pillar 1 and Pillar 2 capital requirements, described below.
Pillar 1 – minimum requirement for capital Pillar 1 focuses on fixed overhead requirements and the Group’s exposure to credit and market risks in respect of risk-weighted assets, and sets a minimum requirement for capital based on these measures. At 31 December 2018, the Group’s draft Pillar 1 minimum requirement for capital was £0.3bn.
The Group has complied with all externally imposed capital requirements during the year. The Group’s Pillar 3 disclosures will be published on the Group’s website at www.standardlifeaberdeen.com/annualreport before 31 December 2019.
The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings which is set out in this note. Related undertakings are subsidiaries, joint ventures, associates and other significant holdings. In this context significant means either a shareholding greater than or equal to 20% of the nominal value of any class of shares, or a book value greater than 20% of the Group’s assets.
The particulars of the Company’s related undertakings at 31 December 2018 are listed below. For details of the Group’s consolidation policy refer to (b) Basis of consolidation in the Presentation of consolidated financial statements section.
The ability of subsidiaries to transfer cash or other assets within the Group for example through payment of cash dividends is generally restricted only by local laws and regulations, and solvency requirements. Included in equity attributable to equity holders of Standard Life Aberdeen plc at 31 December 2018 is £81m (2017: £85m) related to the Standard Life Foundation, a subsidiary undertaking of the Group. During the year to 31 December 2017 the Company made a donation to the Standard Life Foundation related to the unclaimed shares and unclaimed cash that were transferred to the Company on expiry of the Unclaimed Asset Trust claim period in 2016. These assets are now restricted to be used for charitable purposes. Additionally dividends payable on Aberdeen’s preference shares rank ahead of any dividends paid on Aberdeen’s ordinary shares. These are not considered significant restrictions on the Group’s ability to access or use the assets and settle the liabilities of the Group.
The registered head office of all related undertakings is 1 George St, Edinburgh, EH2 2LL unless otherwise stated. (a) Direct subsidiaries Name of related undertaking Share class1 % interest held 1825 Financial Planning Limited2 Ordinary shares 100% 30 STMA 1 Limited2 Ordinary shares 100% 30 STMA 2 Limited2 Ordinary shares 100% 30 STMA 3 Limited2 Ordinary shares 100% 30 STMA 4 Limited2 Ordinary shares 100% 30 STMA 5 Limited2 Ordinary shares 100% Aberdeen Asset Management PLC3 Ordinary shares 100% Focus Solutions Group Limited5 Ordinary shares 100% Standard Life Aberdeen Trustee Company Limited Ordinary shares 100% Standard Life (Asia Pacific Holdings) Private Limited7 Ordinary shares 100% Standard Life Charity Fund N/A 100% Standard Life Client Management Limited Ordinary shares 100% Standard Life Employee Services Limited Ordinary shares 100% Standard Life Finance Limited Ordinary shares 100% Standard Life Foundation N/A 100% Standard Life Investments (Holdings) Limited Ordinary shares 100% Standard Life (London) Limited2 Ordinary shares 100% Standard Life (Mauritius Holdings) 2006 Limited8 Ordinary shares 100% Standard Life Oversea Holdings Limited Ordinary shares 100% Standard Life Savings Limited Ordinary shares 100% The Standard Life Assurance Company 2006 N/A 100% Threesixty Services LLP9 Limited Liability Partnership 100% Threesixty Support LLP9 Limited Liability Partnership 100%
Aberdeen Standard Investments (Switzerland) AG44 Ordinary shares 100% Aberdeen Standard Investments Australia Limited45 Ordinary shares 100% Aberdeen Standard Investments Co. Ltd. 46 Ordinary shares 100% Aberdeen Standard Investments Columbia SAS47 Ordinary shares 100% Aberdeen Standard Investments Deutschland AG48 Ordinary shares 94% Aberdeen Standard Investments ETFs (US) LLC49 Limited Liability company 100% Aberdeen Standard Investments ETFs Advisors LLC49 Limited Liability company 100% Aberdeen Standard Investments ETFs Sponsor LLC49 Limited Liability company 100% Aberdeen Standard Investments Ireland Limited50 Ordinary shares 100% Aberdeen Standard Investments Limited Ordinary shares 100% Aberdeen Standard Investments Luxembourg S.A.26 Ordinary shares 100% Aberdeen Standard Investments Nominees Services (HK) Limited41 Ordinary shares 100% Aberdeen Standard Investments Taiwan Limited37 Ordinary shares 100% Aberdeen Standard Islamic Investments (Malaysia) Sdn. Bhd. 43 Ordinary shares 100% Aberdeen Standard Life Asset Management Limited Ordinary shares 100% Aberdeen Standard Life Group Limited Ordinary shares 100% Aberdeen Standard Life Investments Limited Ordinary shares 100% Aberdeen Standard Life Limited Ordinary shares 100% Aberdeen Standard Limited Ordinary shares 100% Aberdeen Standard Overseas Investment Fund Management (Shanghai) Co., Ltd34
HDFC Life Insurance Company55 Ordinary shares 29% Heng An Standard Life Insurance Company Limited56 Ordinary shares 50% Ignis Asset Management Limited Ordinary shares 100% Ignis Cayman GP2 Limited11 Ordinary shares 60% Ignis Cayman GP3 Limited11 Ordinary shares 60% Ignis Fund Managers Limited Ordinary shares 100% Ignis Investment Services Limited Ordinary shares 100% Jones Sheridan Financial Consulting Limited2 Ordinary shares 100% Jones Sheridan Holdings Limited2 Ordinary shares 100%
Standard Life Investments Global SICAV Global Equity Unconstrained Fund63 SICAV 22% Standard Life Investments Global SICAV II
Name of related undertaking Share class1 % interest held Standard Life Investments Global SICAV II MyFolio Multi-Manager I Fund63 SICAV 35% Standard Life Investments Global SICAV II MyFolio Multi-Manager II Fund63 SICAV 24% Standard Life Investments Global SICAV II MyFolio Multi-Manager III Fund63 SICAV 29% Standard Life Investments Global SICAV II MyFolio Multi-Manager IV Fund63 SICAV 36% Standard Life Investments Global SICAV II MyFolio Multi-Manager V Fund63 SICAV 52%
Registered offices 2 14th Floor, 30 St Mary Axe, London, EC3A 8BF 3 10 Queen's Terrace, Aberdeen, AB10 1XL 4 Bow Bells House, 1 Bread Street, London, EC4M 9HH 5 Cranford House, Kenilworth Road, Blackdown, Leamington Spa, CV32 6RQ 6 Juxon House, 100 St Paul's Churchyard, London, EC4M 8BU 7 133 Cecil Street, #13-03 Keck Seng Tower, 069535, Singapore 8 c/o SGG Fund Services (Mauritius) Ltd, 33 Edith Cavell Street, Port Louis, 11324, Mauritius 9 2nd Floor, The Royals, Altrincham Road, Sharston, Manchester, M22 4BJ 10 2-8 avenue Charles De Gaulle, L-1653 Luxembourg, Luxembourg 11 c/o Maples Corporate Services Limited, Ugland House, PO Box 309, George
Canada 41 6th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong 42 Otemachi Financial City Grand Cube 9F, 1-9-2 Otemachi, Chiyoda-ku, 1000004, Tokyo, Japan 43 Suite 1005, 10th Floor, Wisma Hamzah-Kwong Hing No.1, Leboh Ampang 50100 Kuala Lumpur, Malaysia 44 Schweizergasse 14, Zurich, 8001, Switzerland 45 Level 10, 255 George Street, Sydney, NSW 2000, Australia 46 13th Fl., B Tower (Seocho-dong, Kyobo Tower Building), 465, Gangnam-daero,
Seocho-gu, Seoul, Korea 47 AC 82 NO. 10 60 P 5 Bogota DC, Columbia 48 Bockenheimer Landstrasse 25, 60325 Frankfurt am Main, Germany 49 712 5th Ave, New York, NY 10019, USA 50 24 Merrion Row, Dublin 2, Republic of Ireland 51 2 College Square, Anchor Road, Bristol , BS1 5UE 52 11th Floor, Two Snowhill, Birmingham, B4 6WR 53 7th Floor, 40 Princes Street, Edinburgh, EH2 2BY 54 HDFC House, 2nd floor, H.T. Parekh Marg, 165-166, Backbay Reclamation,
Mahalaxmi, Mumbai - 400011, Maharashtra, India 56 18F, Tower II, The Exchange, 189 Nanjing Road, Heping District, Tianjin,
People’s Republic of China, 300051 57 Clayton Wood Close, West Park Ring Road, Leeds, LS16 6QE 58 40th Floor, Tower One, Times Square, 1 Matheson Street, Causeway Bay,
Hong Kong 59 100 Avenue des Champs Elysees, 1 Rue de Berri, F- 75008, Paris, France 60 30th Floor, Jardine House, One Connaught Place, Hong Kong 61 44 Esplanade, St Helier, Jersey, JE4 9WG 62 8 Marina Boulevard #05-02, Marina Bay Financial Centre Tower 1 01 8981,
Singapore 63 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg 64 1735 Market St, 32nd FL, Philadelphia, PA 19103, USA 65 5 Lister Hill, Horsforth, Leeds, LS18 5AZ 66 Citadel House, 6 Citadel Place, Ayr, KA7 1JN 67 c/o Aon, PO Box 33, Maison Trinity, Trinity Square, St Peter Port, Guernsey
Equity Share capital G 353 364 Shares held by trusts H (88) (36) Share premium reserve G 640 639 Retained earnings I
Brought forward retained earnings 1,564 1,351 Profit for the year 461 624 Other movements in retained earnings 10 (411)
The financial statements on pages 225 to 236 were approved by the Board and signed on its behalf, by the following Directors: Sir Douglas Flint Bill Rattray Chairman Chief Financial Officer 13 March 2019 13 March 2019
The Notes on pages 228 to 236 are an integral part of these financial statements.
equity Total equity 2018 Notes £m £m £m £m £m £m £m £m
Profit for the year – – – 624 – 624 Other comprehensive income for the year – – – – (17) (17) Total comprehensive income for the year – – – 624 (17) 607 Issue of share capital G 122 – 5 – 3,972 4,099 Dividends paid on ordinary shares – – – (469) – (469) Reserves credit for employee share-based payment schemes J – – – – 96 96 Transfer to retained earnings for vested employee share-based payment schemes J – – – 86 (54) 32 Shares acquired by employee trusts – (63) – – – (63) Shares distributed or sold by employee trusts – 29 – (28) – 1
On 1 January 2018 the company adopted IFRS 9 Financial Instruments: Recognition and Measurement. Financial assets are classified at initial recognition based on whether their contractual cash flows are solely payments of principal and interest (SPPI) and the nature of the business model they are managed under. This has resulted in the Company’s equity securities and interests in pooled investment funds being classified as fair value through profit or loss (FVTPL) and the Company’s debt securities, loans to subsidiaries, receivables and other financial assets and cash being measured at amortised cost except where they do not meet the SPPI test and are therefore classified as FVTPL. Derivative instruments are measured at fair value.
Changes in fair value of all financial instruments classified as FVTPL and derivative instruments are recognised in profit or loss except for derivative instruments that are designated as a hedging instrument in a cash flow hedge. Interest is credited to profit or loss using the effective interest rate method for financial instruments measured at amortised cost.
The Company has elected to continue applying the hedge accounting requirements of IAS 39. Therefore the hedge accounting policy is the same as that given in the consolidated financial statements.
The main impact of adopting IFRS 9 is that the Company’s debt securities previously classified as available-for-sale (AFS) and therefore measured at fair value are now measured at amortised cost. As permitted by IFRS 9 comparatives have not been restated.
At 31 December 2017 the fair value of AFS securities was £857m with a corresponding AFS financial assets reserve balance of £15m and deferred tax liability of £3m. On reclassification, the Company’s debt securities were recognised at 1 January 2018 at their amortised cost (less expected credit losses) of £839m. The available-for-sale financial assets reserve balance and the related deferred tax liability were no longer recognised. The expected credit losses at 1 January 2018 were less than £1m.
(a)(ii) Investment in subsidiaries, associates and joint ventures The Company has certain subsidiaries which are investment vehicles such as open-ended investment companies, unit trusts and limited partnerships whose primary function is to generate capital or income growth through holding investments. This category of subsidiary is held at FVTPL since they are managed on a fair value basis.
The areas where judgements have the most significant effect on the amounts recognised in the financial statements are as follows: Financial statement area Critical accounting estimates and assumptions Related notes
(a) Operations held for sale Following the Group’s announcement of the proposed sale (the Sale) of the UK and European insurance business to Phoenix Group Holdings (Phoenix) on 23 February 2018, the Company’s investments in Standard Life Assurance Limited (SLAL), excluding the loan to SLAL classified as an equity investment, and Vebnet (Holdings) Limited (Vebnet) were classified as held for sale and measured at their carrying amount.
 On 11 May 2018 the Company increased its investment in Focus Solutions Group Limited through the purchase of 200,000,000 ordinary shares for a cash consideration of £20m
 On 18 May 2018 the Company increased its investment in Aberdeen Asset Management PLC (Aberdeen) through the purchase of 31,547,174 ordinary shares for a cash consideration of £101m
 On 16 August 2017 the Company increased its investment in Standard Life Assurance Limited through the purchase of 13,000,000 ordinary shares for a cash consideration of £13m
 On 13 December 2017 the Company increased its investment in Aberdeen through the purchase of 125,000,000 ordinary shares for cash consideration of £400m
(c) Disposals During 2018, the Company made the following disposals of subsidiaries measured at cost:  On 30 August 2018, SLAL repaid a loan from the Company with the principal amount of £500m. This bond had been classified as an equity investment in SLAL and its repayment reduced the Company’s investment in SLAL by £486m.
The Company’s investment in its subsidiary Focus Solutions Group Limited (Focus) was impaired during 2018 by £19m (2017: £7m). The recoverable amount of Focus is £13m (2017: £11m) which is its value in use and has been determined using a discount rate of 12% (2017: 12%).
(e) Investments in subsidiaries at FVTPL Investments in subsidiaries at FVTPL, valued at £218m (2017: £333m), relate to a holding in money market funds over which the Company has control. Holdings in two further funds were reclassified to equity securities and interests in pooled investment funds, following the sale of Standard Life Assurance Limited to Phoenix.
B. Investments in associates and joint ventures 2018 2017 £m £m
The Company has an interest of 25.3% (2017: 25.3%) in Tenet Group Limited, a company incorporated in England and Wales. The year end date for Tenet Group Limited is 30 September which is different from the Company’s year end date of 31 December. For the purposes of the preparation of the Company’s financial statements, financial information for the year ended 31 December is used.
(b) Investment in joint venture The Company has a 50% (2017: 50%) interest in Heng An Standard Life Insurance Company Limited (HASL), a company incorporated in China. On 19 April 2018, the Company made a US$95m (£72m) capital contribution to HASL. Further details on this joint venture are provided in Note 16 of the Group financial statements.
The amount of debt securities expected to be recovered or settled after more than 12 months is £270m (2017: £291m). The amount of loans to subsidiaries expected to be recovered or settled after more than 12 months is £6m (2017: £324m).
On 18 October 2017, the Company 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 Company entered into a cross-currency swap which is designated as a hedge of future cash flows.
Cash outflows Cash flow hedges (22) (73) (91) (578) (764) Foreign exchange forwards (6) – – – (6)
Due from related parties 49 43 Collateral pledged in respect of derivatives contracts – 28 Contingent consideration asset 8 – Other financial assets – 5 Total receivables and other financial assets 57 76
The carrying amounts disclosed above reasonably approximate the fair values at the year end.
Amounts due to related parties are expected to be recovered within 12 months.
H. 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) and the Unclaimed Asset Trust (UAT). Further details of these trusts are provided in Note 27 of the Group financial statements.
Available-forsale financial assets Cash flow hedges Total 2017 £m £m £m £m £m £m
On completion of the sale of the investment in Standard Life Assurance Limited, (refer Note A) £1,290m (2017: £nil) was transferred from the merger reserve to retained earnings.
As part of the return of capital, £1,000m (2017: £nil) was transferred from the merger reserve to the capital redemption reserve. A further £11m (2017:£nil) was also recognised in the capital redemption reserve for the share buyback (refer Note 26 of the Group financial statements).
Following the completion of the merger of Standard Life plc and Aberdeen on 14 August 2017 an amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of Aberdeen and their fair value on that date. Further information on the merger reserve and special reserve is given in Note 29 of the Group financial statements.
Subordinated liabilities M 1,086 1,086 Other financial liabilities O 69 69
Subordinated notes: 4.25% US Dollar fixed rate due 30 June 2028 (2017 – 30 June 2048) $750m £586m $750m £556m 5.5% Sterling fixed rate due 4 December 2042 £500m £500m £500m £500m
Mutual Assurance Capital Securities: 6.546% Sterling fixed rate perpetual – – £300m £318m Total subordinated liabilities £1,086m £1,876m
On 30 August 2018, the Company’s subordinated guaranteed bonds and MACS were reclassified as non shareholders’ equity. Refer Note K.
The amount of deferred tax assets expected to be recovered or settled after more than 12 months are £22m (2017: £nil).
P. Other liabilities Other liabilities of £86m (2017: £1m) are expected to be settled within 12 months.
(b) Indemnities and guarantees Under the trust deed in respect of the UK Standard Life defined benefit pension plan, Standard Life Employee Services Limited (SLESL), the principal employer, must pay contributions to the pension plan as the trustees’ actuary may certify necessary. The Company guarantees the obligations of certain subsidiaries’ UK and Ireland defined benefit pension plans, which did not give rise to any liabilities at 31 December 2018 (2017: £nil).
The Directors and key management personnel of the Company are considered to be the same as for the Group. See Note 46 of the Group financial statements for further information.
10. Supplementary information 10.1 Alternative performance measures We assess our performance using a variety of measures that are not defined under IFRS and are therefore termed alternative performance measures (APMs). The APMs that we use may not be directly comparable with similarly named measures used by other companies.
Adjusted profit reporting provides further analysis of the results reported under IFRS and the Directors believe it helps to give shareholders a fuller understanding of the performance of the business by identifying and analysing adjusting items. Adjusted profit before tax is consistent with the way that financial performance is measured by management and reported to the Board and executive committee. Adjusted profit before tax is also a key input to the adjusted earnings per share measure which is used to assess performance for remuneration purposes.
Adjusted cash generation provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to shareholders. The IFRS consolidated statement of cash flows includes policyholder cash flows, and therefore does not present a shareholder view, and does not exclude adjusting items.
Adjusted profit before tax The table below reconciles adjusted profit before tax from continuing operations to Profit before tax.
Share of associates’ and joint ventures’ profit before tax 46 41 35 140 58 41 186 99 76 Adjusted profit before tax from continuing operations 510 602 653 140 58 41 650 660 694
Operating profit before tax (Phoenix APM) 458 92 Finance costs (30) (6) Adjusted profit before tax (Standard Life Aberdeen APM) 428 86 238 Standard Life Aberdeen 2018
Restructuring and corporate transaction expenses (239) (162) (42) (264) (11) (25) (503) (173) (67) Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts (1,155) (138) (38) – – – (1,155) (138) (38) Provision for annuity sales practices – – – – (100) (175) – (100) (175) Profit on disposal of subsidiaries – – – 1,780 – – 1,780 – – Profit on disposal of interests in associates 185 319 – – – – 185 319 – Impairment of associates (228) – – – – – (228) – – Investment return variances and economic assumption changes 54 – – (41) 67 13 13 67 13
An explanation for why individual items are excluded from adjusted profit is set out below:  Restructuring and corporate transaction expenses are excluded from adjusted profit. Restructuring includes the impact of major regulatory change. By highlighting and excluding these costs we aim to give shareholders a fuller understanding of the performance of the business. Restructuring and corporate transaction expenses include costs relating to the integration of businesses acquired. Other restructuring costs excluded from adjusted profit relate to projects which have a significant impact on the way the Group operates. Costs are only excluded from adjusted profit where they are outwith business as usual activities and the costs would not have been incurred had the restructuring project not taken place. For headcount related costs, where duplicate posts are identified as a result of an integration plan, the duplicated cost will be treated as a restructuring cost from the beginning of the process which eliminates the duplicate cost. For continuing operations, the 2018 expenses mainly relate to integration and merger related costs of £191m (2017: £109m of which £59m relates to transaction costs) which included £20m of merger related costs relating to the accounting impact of the alignment of Aberdeen and Standard Life Investments variable pay structures. For discontinued operations, the 2018 expenses mainly related to the redemption of our Tier 1 subordinated bonds of £198m (2017: £nil), and £53m (2017: £nil) of separation costs relating to the sale of the UK and European insurance business to Phoenix. 2018 also included £14m of costs in relation to Brexit which we consider to be a major regulatory change. The residual costs of £47m related to other restructuring and corporate transaction expenses.
 Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts is included as an adjusting item. This is consistent with peers and therefore excluding these items aids comparability. Highlighting this as an adjusting item aims to give a fuller understanding of these accounting impacts which arise where businesses have been acquired but do not arise where businesses have grown organically. 2018 includes the £880m impairment of the Aberdeen Standard Investments goodwill intangible asset, reflecting the impact of markets and flows on future earnings expectations. Further details are provided in Note 14.
 Profits on the disposal of a subsidiary, joint venture or associate are also removed to assist comparability of results period on period. The sale of our UK and European insurance subsidiary completed on 31 August 2018. Profit on disposal of interests in associates in 2018 of £185m includes £177m in relation to the HDFC Asset Management IPO. Details are provided in Note 1 of the Group financial statements.
 Details on items classified as ‘Other’ in the table on the previous page are provided in Note 12 of the Group financial statements. In 2018 this balance primarily relates to a held for sale accounting adjustment. Following the classification of the UK and European insurance business as held for sale on the announcement of the transaction on 23 February 2018, no amortisation or depreciation was recognised. This increase to profit was classified as an adjusting item as it related to the disposal of a subsidiary.
The table below provides a reconciliation of movements between adjusted profit component measures and their closest IFRS equivalent: Adjusted profit term
IFRS IFRS term 2018 £m £m £m £m £m £m £m
Fee based revenue 1,447 360 345 13 – – 2,165 Total income Adjusted operating expenses (1,084) (360) (328) – – – (1,772) Total expenses Capital management 13 – – (13) – – – N/A Share of associates’ and joint ventures’ profit before tax 99 – (13) – (41) – 45
Adjusted profit after tax from discontinued operations 348 – (51) – – 25 322
Adjusted profit after tax 705 – 2 – – 25 732 Profit for the year
Asset management and platforms 420 495 Insurance associates and joint ventures 33 10 Adjusted cash generation (continuing operations) 453 505
IFRS Net cash flow from operating activities – total Group Consolidated statement of cash flows 826 2,194 Less: Net cash flows from operating activities – discontinued operations, platforms and corporate centre (482) (1,846) Net cash flow from operating activities – Aberdeen Standard Investments1 344 348 Pro forma adjustment for pre-merger results2 – 140 Restructuring and corporate transaction expenses paid – Aberdeen Standard Investments 124 63 Adjusted cash generation – Aberdeen Standard Investments 468 551 Adjusted cash generation – platforms and corporate centre (48) (56) Adjusted cash generation – Asset management and platforms (2017 on Pro forma basis) 420 495 1 From 2018, net cash flow from operating activities excludes movements between cash and pooled cash funds. 2 The Pro forma adjustment adds pre-merger results for Aberdeen which are excluded from the consolidated statement of cash flows.
This is an efficiency measure that is calculated as adjusted operating expenses divided by adjusted operating income in the period, and includes the share of associates’ and joint ventures’ profit before tax.
This ratio is used by management to assess efficiency and reported to the Board and executive committee. This ratio is also a measure used to assess performance for remuneration purposes.
Adjusted diluted earnings per share is calculated on adjusted profit after tax. The weighted average number of ordinary shares in issue is adjusted during the period to assume the conversion of all dilutive potential ordinary shares, such as share options granted to employees. Details on the calculation of adjusted diluted earnings per share are set out in Note 11 in the Group financial statements section.
Earnings per share is a commonly used financial metric which can be used to measure the profitability and capital efficiency of a company over time. We also calculate adjusted diluted earnings per share to illustrate the impact of adjusting items on the metric. This ratio is used by management to assess performance and reported to the Board and executive committee.
Share of associates’ and joint ventures’ profit before tax (£m) 186 99 76 99 76 Total adjusted operating income and share of associates’ and joint ventures’ profit before tax (£m) 2,054 2,198 2,127
Pro forma basis Reported basis Pro forma basis Reported basis Pro forma basis Reported basis £m £m £m £m £m £m £m £m £m
Dividend paid on preference shares (5) (5) – – – – (5) (5) – Adjusted profit after tax attributable to equity holders of the Company 507 511 357 133 348 348 640 859 705
Weighted average number of ordinary shares outstanding 2,848 2,943 2,343 2,848 2,943 2,343 2,848 2,943 2,343 Dilutive effect of share options and awards – 29 17 – 29 17 – 29 17 Weighted average number of diluted ordinary shares outstanding 2,848 2,972 2,360 2,848 2,972 2,360 2,848 2,972 2,360
(Comparatives shown on a Pro forma basis) 2018 2017 2018 2017 2018 2017
SL Asia 12 12 Retail advice and other3 43 46 Performance fees 9 26 Group fee based revenue 1,868 2,099 2 Includes Wealth/Digital. 3 Includes 1825, Focus and Threesixty.
As an investment company, AUMA and flows are key drivers of shareholder value. AUMA has been restated to exclude associates, joint ventures, SL Asia and is also only presented on a continuing operations basis. This change has been made to simplify disclosures and to better align asset and fee revenue disclosures. A reconciliation of AUMA and net flows to previously disclosed information is provided in Section 10.5.
As an investment company, AUMA and flows are key drivers of shareholder value. Gross inflows have been included as a KPI in 2018 to align with our remuneration measures. Gross inflows and net flows has been restated to exclude associates, joint ventures, SL Asia and is also only presented on a continuing operations basis.
Closing AUMA at 31 Dec 2018 £bn £bn £bn £bn £bn £bn £bn 1 Corporate actions relate to the acquisition of £4.8bn of AUM in transactions with Alpine Woods, ETF Securities and Hark Capital. 2 Includes Wealth/Digital.
10. Supplementary information continued 12 months ended 31 December 2017 (Pro forma basis)
Closing AUMA at 31 Dec 2017 £bn £bn £bn £bn £bn £bn £bn 10.3.2 Quarterly net flows 3 months to 3 months to 3 months to £bn £bn £bn £bn £bn
1 Corporate actions include the closure of an uneconomic multi-manager fund range and the rationalisation of the US fixed income business. 2 Includes Wealth/Digital.
10.4 AUM and flows (excludes strategic insurance partners) 10.4.1 Detailed asset class split and by channel
10.4.2 AUM by geography (excludes strategic insurance partners) 12 months ended 31 December 31 Dec 2018 31 Dec 2017 £bn £bn
Europe, Middle East and Africa (EMEA) 57.1 61.8 Asia Pacific (APAC) 18.2 22.7 10.4.3 Total AUM by asset class 31 Dec 2018 31 Dec 2017
10.5 AUMA – reconciliation to previously disclosed information 12 months ended 31 December 2017 (Pro forma basis)
Opening AUMA at 1 Jan 2017 Gross inflows Redemptions Net flows
Standard Life Aberdeen plc AUMA as reported 647.6 80.1 (111.1) (31.0) 42.6 (4.3) 654.9
Less: India and China life (4.6) (1.0) 0.5 (0.5) (0.3) 0.6 (4.8) Total Standard Life Aberdeen AUMA 607.9 72.4 (105.3) (32.9) 36.8 (3.7) 608.1
Adjusted operating expenses Adjusted operating expenses is a component of adjusted profit and relates to the day-to-day expenses of managing our business.
 Fair value movements in contingent consideration  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group Adjusted profit also excludes impacts arising from short-term fluctuations in investment return variances (formerly called short-term fluctuations in investment return) and economic assumption changes in the Group’s insurance entities. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from adjusted profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from adjusted profit and is presented within profit before tax.
Assets under management and administration (AUMA) AUMA is a measure of the total assets we manage or administer on behalf of our clients and customers. It includes assets under management (AUM) and assets under administration (AUA). AUMA does not include AUM/AUA for associates and joint ventures and is also only presented on a continuing operations basis.
CRD IV CRD IV is the European regulatory capital regime (comprising the Capital Requirements Directive and Capital Requirements Regulation) that applies to investment firms. Following the sale of the UK and European insurance business to Phoenix, the Group is supervised under the CRD IV regulatory regime for group prudential supervisory purposes. Previously, SLA was regulated as an insurance group subject to Solvency II.
Fee based business/revenue Fee based business is a component of adjusted profit and includes products where we generate revenue primarily from asset management charges (AMCs), premium based charges and transactional charges. AMCs are earned on products such as SIPP, corporate pensions and mutual funds, and are calculated as a percentage fee based on the assets held. Investment risk on these products rests principally with the customer, with our major indirect exposure to rising or falling markets coming from higher or lower AMCs. Fee based revenue is shown net of fees, commissions and similar charges (e.g. rebates and initial charges).
Fee revenue yield (bps) The average revenue yield on fee based business is a measure that illustrates the average margin being earned on the assets that we manage or administer. It is calculated as annualised fee based revenue (excluding performance fees, SL Asia, 1825, Focus and Threesixty) divided by monthly average fee based assets under management/administration.
Key performance indicators (KPI) A measure by reference to which the development, performance or position of the business can be measured effectively.
Net flows Net flows represent gross inflows less gross outflows or redemptions. Gross inflows are new funds from clients and customers. Gross outflows or redemptions is the money withdrawn by clients or customers during the period.
Pillar 3 This complements Pillar 1 and Pillar 2 with the aim of improving market discipline by requiring companies to publish certain details of their risks, capital and risk management. The Group’s Pillar 3 disclosures will be published on the Group’s website at www.standardlifeaberdeen.com/annualreport before 31 December 2019.
Retail Our UK Retail business offers a range of leading asset administration and financial planning services to advised and non-advised customers through our retail Platforms (Wrap, Elevate and Fundzone) and our 1825 financial advice business.
Solvency II Solvency II is the European regulatory capital regime that applies to insurance firms.
Spread/risk business Spread/risk business relates to our discontinued UK and European insurance business and mainly comprises products where we provide a guaranteed level of income for our customers in return for an investment, for example, annuities. The ‘spread’ referred to in the title primarily relates to the difference between the guaranteed amount we pay to customers and the actual return on the assets over the period of the contract.
Standard Life Following completion of the sale of our UK and European insurance business to Phoenix in August 2018, we have retained ownership of the Standard Life brand while also licensing it to Phoenix. The Standard Life brand will continue to be a prominent feature of our retail platforms.
Shareholder services We offer a wide range of shareholder services. For more information, please:  Contact our registrar, Link, who manage this service for us. Their details can be found on the inside back cover.
Last date for DRIP elections for 2019 interim dividend 04 September
Aberdeen Share Account – which had 1,022,001 participants holding 648,081,141 shares.
Certain measures such as adjusted profit before tax, are not defined under IFRS and are therefore termed alternative performance measures (APMs). Further details on APMs are included in Supplementary information in Section 10.
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