NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Basis of Preparation The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and as adopted by the European Commission (EC) for use in the European Union effective for 2005 year ends. The Group's financial statements also comply with IFRS as issued by the IASB. In June 2005 the IASB issued an amendment to International Accounting Standard (IAS) 39 'Financial Instruments: Recognition and Measurement' which restricts the use of the fair value option for both assets and liabilities unless certain conditions are met for annual periods beginning on or after 1 January 2006. The Group has early adopted this amendment in these financial statements. The Group has also elected to early adopt the amendment to IAS 19 'Employee Benefits', permitting the recognition of all actuarial gains and losses immediately in equity through the Statement of Recognised Income and Expense (SORIE). The amendments to these standards have been adopted by the EC. In accordance with IFRS 4 'Insurance Contracts', the Group continues to apply existing accounting policies to its insurance contracts and participating investment contracts, but has the option to make improvements to its policies if the changes make the financial statements more relevant to decision making needs of the users. The Group has elected to make improvements to its accounting policy for participating contracts in the UK by adopting FRS 27 'Life Assurance' issued by the UK Accounting Standards Board (ASB) in December 2004. The ASB has acknowledged the difficulty of applying the requirements of FRS 27 retrospectively and it is the Group's view that it would be impracticable to do so. Therefore only the balance sheet at 31 December 2004 has been restated for the impact of FRS 27. No restatements for FRS 27 have been made to either the IFRS opening balance sheet or the 2004 income statement. The preparation of the financial statements includes the use of estimates and assumptions that affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. The significant estimates and assumptions used are disclosed in the relevant notes to these financial statements. The principal accounting policies adopted in preparing these financial statements are set out below. The accounting policies have been consistently applied to all years presented, unless otherwise stated. Restatement of Comparatives After the 2004 Full Year Results were restated under International Financial Reporting Standards, the interpretation of provisions within IAS 32, 'Financial Instruments: Disclosure and Presentation', has required the £400m 5.875% undated subordinated notes to be classified as equity, rather than as a liability. The change in classification has resulted in an increase in reported profit after tax for 2004 of £12m, due to the corresponding reclassification of interest payments as distributions and an increase in total equity of £398m. The comparatives have also been restated for the adjustment of £49m to transfer Gresham discontinued expenses from other expenses to acquisition costs. There has been no impact on the financial statements of the Group's early adoption of the amendment to IAS 39 on the use of the fair value option. First Time Adoption of IFRS The Group is required to determine its IFRS accounting polices and apply them retrospectively to establish its opening balance sheet under IFRS. However, IFRS 1 'First-time adoption of International Financial Reporting Standards' allows a number of exceptions and exemptions on adoption of IFRS for the first time. The date of transition to IFRS for the Group is 1 January 2004, as required by IFRS. The disclosure required by IFRS 1 concerning the transition from UK GAAP to IFRS is given in Note 52. The Group has not taken advantage of the exemption from the requirement to restate comparative information in the first year of adoption of IFRS for IAS 32, IAS 39 and IFRS 4. The Group has taken advantage of the following exceptions and exemptions as permitted by IFRS 1: Cumulative translation differences Cumulative translation differences of foreign operations have not been restated on an IFRS basis. These are deemed to be zero at the date of transition. Share-based payment plans The provisions of IFRS 2 'Share-based Payment', have not been applied to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005. Compound financial instruments The equity components of historic compound financial instruments which were no longer outstanding at the date of transition to IFRS have not been separated. Business combinations For business combinations before 1 January 2004 the Group has elected not to apply the provisions of IFRS 3, 'Business Combinations' retrospectively. Accordingly no adjustments have been made for historical business combinations. Basis of Consolidation The consolidated financial statements incorporate the assets, liabilities, equity, revenues, expenses and cash flows of the Company and of its subsidiary undertakings drawn up to 31 December each year. Subsidiaries are those entities (including special purpose entities, mutual funds and unit trusts) in which the Group directly or indirectly has the power to govern the operating and financial policies in order to gain economic benefits. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of gaining control. Associates and Joint Ventures Associates are entities over which the Group has significant influence but which it does not control. Consistent with IAS 28, 'Investments in Associates' it is presumed that the Group has significant influence where it has between 20% and 50% of the voting rights in the investee. Joint ventures are entities where the Group and other parties undertake an activity which is subject to joint control. The Group has interests in associates and joint ventures which form part of an investment portfolio held through venture capital partnerships, mutual funds, unit trusts and similar entities. In accordance with the choices permitted by IAS 28 and IAS 31, 'Interests in Joint Ventures' these interests have been classified as fair value through profit or loss and measured at fair value, with changes in fair value recognised in the income statement. Associates which do not form part of an investment portfolio are initially recognised in the balance sheet at cost. The carrying amount of the associate is increased or decreased to reflect the Group's share of the profit or loss after the date of the acquisition. Product classification The Group's products are classified for accounting purposes as either insurance contracts (participating and non-participating) www.legalandgeneralgroup.com 53

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