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Notes to the consolidated fnancial statements (continued)

for the year ended 30 June 2011

33. Signifcant accounting policies (continued)

33.3 Signifcant accounting policies specifcally applicable to Life (continued)

33.3.1 Life revenue and expense recognition (continued)

(e) Basis of expense apportionment (continued) Statistics such as policy counts, annual premiums, funds under management and claims payments are used to apportion the expenses to individual life insurance and life investment products.

33.3.2 Financial assets backing life insurance and life investment liabilities

The Suncorp Group has determined that all fnancial assets within its statutory funds are assets backing policy liabilities. These fnancial assets are designated as fair value through proft or loss as they are measured on a basis that is consistent with the measurement of the liabilities. These fnancial assets include investment securities and receivables.

33.3.3 Financial assets not backing life insurance and life investment liabilities

Financial assets held within the shareholder funds do not back life insurance liabilities or life investment liabilities and include investment securities and receivables. Investment securities are designated as fair value through proft or loss as they are managed and their performance evaluated on a fair value basis for internal and external reporting in accordance with the investment strategy. Receivables are measured at amortised cost less accumulated impairment losses.

33.3.4 Deferred acquisition costs

Life insurance contracts – deferred acquisition costs include the fxed and variable costs of acquiring new business and include commissions, certain advertising and underwriting costs. These costs are implicitly deferred through Margin on Service accounting. The amount deferred is subject to an overall limit such that the value of future profts at inception cannot be negative.

Life investment contracts – deferred acquisition costs include the variable costs of acquiring new business and include commission costs. They are amortised in accordance with the expected earning pattern of the associated revenue. All other acquisition costs are expensed as incurred.

33.3.5 Policy liabilities

(a) Life insurance contracts

Life insurance contract liabilities are calculated using the Margin on Services (MoS) methodology. Under MoS, the excess of premium received over expected claims and expenses is recognised over the life of the contract in a manner that refects the pattern of risk accepted from the policyowner.

The projection method is generally used to determine life insurance contract liabilities. The net present value of projected cash fows is calculated using best estimate assumptions about the future. When the benefts under the life insurance contract are linked to the assets backing it, the discount rate applied is based on the expected future earnings rate of those assets. Otherwise, a risk-free discount rate is used.

An accumulation method has been used for some Suncorp Group risk business, where the liability is based on an unearned premium reserve, less an explicit allowance for deferred acquisition costs, and a reserve for incurred but not reported claims.

Participating policies are entitled to share in the profts that arise from participating business. This proft sharing is governed by the Life Act and the Life companies’ constitutions. The participating policyowner proft sharing entitlement is treated as an expense in the proft or loss. The operating proft arising from discretionary participating contracts is allocated between shareholders and participating policyowners by applying the MoS principles in accordance with the Life Act and the New Zealand Society of Actuaries Professional Standard Number 3 Determination of Life Insurance Policy Liabilities .

Proft allocated to participating policyowners is recognised as an increase in policy liabilities. Both the element of this proft that has not yet been allocated to specifc policyowners (i.e. unvested) and that which has been allocated to specifc policyowners by way of bonus distributions (i.e. vested) are included within life insurance contract liabilities. (b) Life investment contracts

A life investment contract involves both the origination of a fnancial instrument and the provision of investment management services. Policy liabilities are measured at the fair value of the fnancial instrument component of the contract (designated as fair value through proft or loss) plus the liability in respect of the management services element. The management services element, including associated acquisition costs, is recognised as revenue as services are performed.

For investment-linked products, the life investment contract liability is directly linked to the performance and value of the assets that back them and is determined as the fair value of those assets after tax. For fxed income policies, the liability is determined as the net present value of expected cash fows, subject to a minimum of current surrender value. (c) Liability adequacy test

The adequacy of the life insurance liabilities is evaluated each year. The liability adequacy test considers current estimates of all contractual and related cash fows. If it is determined, using best estimate assumptions, that a shortfall exists, the shortfall is immediately recognised in the proft or loss.