2 Significant accounting policies continued possibility of withdrawal; or providing bank overdrafts together with commission
2.15 Employee benefits continued termination benefits as a result of an offer fees charged in respect of Letters of Credit.
made to encourage voluntary redundancy. Arrangement fees in respect of financing
(c) Share based compensation arrangements are charged over the life
The Group operates a number of equity (e) Profit sharing and bonus plans of the related facilities.
settled share based employee The Group recognises a liability and
compensation plans. These include both an expense for bonuses and profit sharing, 2.19 Provisions
the approved and unapproved share option based on a formula that takes into The Group is subject to various insurance-
schemes, and the Group’s performance consideration the profit attributable to related assessments and guarantee fund
share plans, outlined in the Directors’ the Company’s shareholders after certain levies. Provisions are recognised where
remuneration report together with the adjustments. The Group recognises there is a present obligation (legal or
Group’s Save as You Earn (SAYE) schemes. a provision where a contractual obligation constructive) as a result of a past event that
to employees exists or where there can be measured reliably and it is probable
The fair value of the employee services is a past practice that has created that an outflow of economic benefits will
received, measured at grant date, a constructive obligation. be required to settle that obligation.
in exchange for the grant of the awards
is recognised as an expense, with the (f) Accumulating compensation benefits 2.20 Leases
corresponding credit being recorded The Group recognises a liability and an (a) Hiscox as lessee
in retained earnings within equity. The total expense for accumulating compensation Leases in which significantly all of the risks
amount to be expensed over the vesting benefits (e.g. holiday entitlement), based and rewards of ownership are transferred
period is determined by reference to the fair on the additional amount that the Group to the Group are classified as finance leases.
value of the awards granted, excluding the expects to pay as a result of the unused At the commencement of the lease term,
impact of any non-market vesting conditions entitlement accumulated at the balance finance leases are recognised as assets and
(e.g. profitability or net asset growth sheet date. liabilities at the lower of the fair value of the
targets). Non-market vesting conditions asset and the present value of the minimum
are included in assumptions about the 2.16 Financial liabilities lease payments. The minimum lease
number of awards that are expected to All borrowings drawn are measured at payments are apportioned between finance
become exercisable. At each balance sheet amortised cost at each balance sheet charges and repayments of the outstanding
date, the Group revises its estimates of the date using the effective interest method. liability, finance charges being charged
number of awards that are expected to vest. Any difference between the remeasured to each period of the lease term so as to
It recognises the impact of the revision amortised cost carrying amount and the produce a constant rate of interest on the
of original estimates, if any, in the income ultimate redemption amount is recognised outstanding balance of the liability. All other
statement, and a corresponding adjustment in the income statement over the period leases are classified as operating leases.
to equity, over the remaining vesting period. of the borrowings. Payments made under operating leases (net
of any incentives received from the lessor)
When the terms and conditions of an 2.17 Net investment hedge accounting are charged to the income statement on a
equity settled share based employee In order to qualify for hedge accounting, straight-line basis over the period of the lease.
compensation plan are modified, and the the Group is required to document in
expense to be recognised increases as advance the relationship between the item (b) Hiscox as lessor
a result of the modification, then the increase being hedged and the hedging instrument. Rental income from operating leases is
is recognised evenly over the remaining The Group is also required to document recognised on a straight-line basis over the
vesting period. When a modification reduces and demonstrate an assessment of the term of the relevant contractual agreement.
the expense to be recognised, there is relationship between the hedged item and
no adjustment recognised and the pre- the hedging instrument, which shows that 2.21 Dividend distribution
modification expense continues to be the hedge will be highly effective on an Dividend distribution to the Company’s
applied. The proceeds received net of any on-going basis. This effectiveness testing shareholders is recognised as a liability
directly attributable transaction costs are is reperformed at each period end to ensure in the Group’s financial statements in the
credited to share capital and share premium that the hedge remains highly effective. period in which the dividends are approved.
when the options are exercised.
The Group hedged elements of its net 2.22 Use of critical estimates,
In accordance with the transitional investment in certain foreign entities through judgements and assumptions
arrangements of IFRS 2 only share based foreign currency borrowings that qualified The preparation of financial statements
awards granted or modified after 7 for hedge accounting from 3 January requires the use of significant estimates,
November 2002, but not yet vested at 2007 until their replacement on 6 May judgements and assumptions. The
the date of adoption of IFRS, are included 2008; accordingly gains or losses on Directors consider the accounting policies
in the calculations. retranslation are recognised in equity to for determining insurance liabilities, the
the extent that the hedge relationship was valuation of investments, the valuation
(d) Termination benefits effective during this period. Accumulated of retirement benefit scheme obligations
Termination benefits are payable when gains or losses will be recycled to the and the determination of deferred tax assets
employment is terminated before the normal income statement only when the foreign and liabilities as being most critical to
retirement date, or whenever an employee operation is disposed of. The ineffective an understanding of the Group’s result
accepts voluntary redundancy in exchange portion of any hedge is recognised and position.
for these benefits. The Group recognises immediately in the income statement.
termination benefits when it is demonstrably The most critical estimate included within
committed to either: terminating the 2.18 Finance costs the Group’s balance sheet is the estimate
employment of current employees Finance costs consist of interest charges for losses incurred but not reported. The
according to a detailed formal plan without accruing on the Group’s borrowings and total estimate as at 31 December 2012
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 61