8.

Group financial statements continued

19. Financial investments

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 majority of the Group’s debt securities and all equity securities and interests in pooled investment funds are designated at FVTPL as they
are part of groups of assets which are managed and whose performance is evaluated on a fair value basis. These investments are
recognised at fair value with changes in fair value recognised in investment return in the consolidated income statement. Commercial real
estate loans are included within debt securities designated at fair value.
All other debt securities are classified as AFS and are recognised at fair value with changes in fair value recognised in other comprehensive
income. Interest is credited to the consolidated income statement using the effective interest rate method. On disposal of an AFS security any
gains or losses previously recognised in other comprehensive income are recognised in the consolidated income statement (recycling).
The accounting policies for other financial investments are detailed in the separate related notes indicated below.

Designated as at
fair value through Held for Available- Loans and
profit or loss trading for-sale receivables Total
2017 Notes £m £m £m £m £m
Loans 20 – – – 91 91
Derivative financial assets 21 – 3,053 – – 3,053
Equity securities and interests in pooled
investment funds 39 99,020 – – – 99,020
Debt securities 39 60,709 – 856 – 61,565
Receivables and other financial assets 22 6 – – 1,236 1,242
Cash and cash equivalents 25 – – – 10,226 10,226
Total 159,735 3,053 856 11,553 175,197

Designated as at
fair value through Held for Available- Loans and
profit or loss trading for-sale receivables Total
2016 Notes £m £m £m £m £m
Investments in associates and joint ventures 16 – – – 3 3
Loans 20 – – – 295 295
Derivative financial assets 21 – 3,534 – – 3,534
Equity securities and interests in pooled
investment funds 39 90,683 – – – 90,683
Debt securities 39 67,312 – 621 – 67,933
Receivables and other financial assets 22 10 – – 1,245 1,255
Cash and cash equivalents 25 – – – 7,938 7,938
Total 158,005 3,534 621 9,481 171,641

The amount of debt securities expected to be recovered or settled after more than 12 months is £50,619m (2016: £55,591m). Due to the nature
of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.

Estimates and assumptions

Determination of the fair value of private equity investments and those debt securities categorised as level 3 in the fair value hierarchy is a key
estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 41.

186 Standard Life Aberdeen 2017

20. Loans
Loans are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method, less any
impairment losses.

2017 2016
Notes £m £m
Loans secured by mortgages 41(e) 57 73
Loans and advances to banks with greater than three months to maturity from
acquisition date 32 220
Loans secured on policies 2 2
Loans 39 91 295

FINANCIAL INFORMATION
Loans with variable rates and fixed interest rates are £38m and £53m respectively (2016: £52m and £243m respectively). Loans that are
expected to be recovered after more than 12 months are £60m (2016: £88m).
21. Derivative financial instruments
A derivative is a financial instrument that is typically used to manage risk and whose value moves in response to an underlying variable such
as interest or foreign exchange rates. The Group uses derivative financial instruments in order to match contractual liabilities, to reduce the
risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve
efficient portfolio management. Certain consolidated investment vehicles also use derivatives to take and alter market exposure, with the
objective of enhancing performance and controlling risk.
Management determines the classification of derivatives at initial recognition. All derivative instruments are classified as held for trading
except those designated as part of a hedging relationship. Held for trading derivatives are measured at fair value with changes in fair value
recognised in the consolidated income statement.
Using derivatives to manage a particular exposure is referred to as hedging. For a derivative to be considered as part of a hedging
relationship its purpose must be formally documented at inception. In addition, the effectiveness of the hedge must be initially high and be
able to be reliably measured on a regular basis. Derivatives used to hedge variability in future cash flows such as coupons payable on
subordinated liabilities or revenue receivable in a foreign currency are designated as cash flow hedges, while derivatives used to hedge
currency risk on investments in foreign operations are designated as net investment hedges.
Where a derivative qualifies as a cash flow or net investment hedge, hedge accounting is applied. The effective part of any gain or loss
resulting from the change in fair value is recognised in other comprehensive income, and in the cash flow or net investment hedge reserve in
equity, while any ineffective part is recognised immediately in the consolidated income statement. If a derivative ceases to meet the relevant
hedging criteria, hedge accounting is discontinued.
For cash flow hedges, the amount recognised in the cash flow hedge reserve is transferred to the consolidated income statement (recycled)
in the same period or periods during which the hedged item affects profit or loss and is transferred immediately if the cash flow is no longer
expected to occur. For net investment hedges, the amount recognised in the net investment hedge reserve is transferred to the consolidated
income statement on disposal of the investment.

2017 2016
Contract Fair value Fair value Contract Fair value Fair value
amount assets liabilities amount assets liabilities
Notes £m £m £m £m £m £m
Cash flow hedges 33 562 – 33 9 – –
Net investment hedges 6 – – 6 – –
Held for trading 19,33 160,838 3,053 780 119,926 3,534 965
Derivative financial instruments 39 161,406 3,053 813 119,941 3,534 965

Derivative assets of £1,957m (2016: £2,460m) are expected to be recovered after more than 12 months. Derivative liabilities of £318m (2016:
£215m) are expected to be settled after more than 12 months.
(a) Cash flow hedges
On 18 October 2017, the Group 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 Group entered into a cross-currency swap which is designated as a cash flow
hedge. The cross-currency swap has a fair value liability position of £33m (2016: £nil). During the year ended 31 December 2017 losses of £33m
(2016: £nil) were recognised in other comprehensive income in relation to the cross-currency swap. In addition £13m (2016: £nil) and less than
£1m (2016: £nil) was transferred from other comprehensive income to Investment return and Finance costs respectively in the consolidated
income statement.
In addition foreign exchange contracts with an aggregate notional principal amount of £8m (2016: £9m) and a net fair value liability position of
less than £1m (2016: less than £1m) were designated as hedges of future cash flows arising from revenue receivable in foreign currency. The

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8. Group financial statements continued

cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2017 and 2016,
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 (2016: £6m) and a net fair value asset position of less than £1m
(2016: liability of less than £1m) were designated as net investment hedges and gave rise to gains for the year of less than £1m (2016: losses 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 2017, the losses recognised in the consolidated income
statement were less than £1m (2016: less than £1m).
(c) Held for trading
Derivative financial instruments classified as held for trading include those that the Group holds as economic hedges of financial instruments that
are measured at fair value. Held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are
measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.

2017 2016
Contract Fair value Fair value Contract Fair value Fair value
amount assets liabilities amount assets liabilities
£m £m £m £m £m £m
Equity derivatives:
Futures 13,244 155 112 5,907 33 88
Variance swaps 13 44 50 17 27 22
Options 7,390 760 37 3,397 571 8
Total return swaps 714 4 16 2,313 3 38
Bond derivatives:
Futures 25,104 116 50 34,125 247 96
Interest rate derivatives:
Swaps 65,346 686 215 22,604 762 148
Floors 40 6 – 44 8 –
Options – – – – – –
Swaptions 6,521 835 6 5,980 1,097 –
Foreign exchange derivatives:
Forwards 35,849 345 234 42,228 704 506
Futures – – – – – –
Options – – – 1 – –
Other derivatives:
Inflation rate swaps 5,464 39 49 2,032 27 41
Credit default swaps 1,153 63 11 1,278 55 18
Derivative financial instruments held for
trading 160,838 3,053 780 119,926 3,534 965

(d) Maturity profile

The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows:
Within 1 2-5 6-10 11-15 16-20 Greater than
year years years years years 20 years Total
2017 £m £m £m £m £m £m £m
Cash inflows
Derivative financial assets 19,733 419 312 147 204 505 21,320
Derivative financial liabilities 11,095 98 118 566 3 – 11,880
Total 30,828 517 430 713 207 505 33,200

Cash outflows
Derivative financial assets (18,731) (27) (21) (15) – – (18,794)
Derivative financial liabilities (11,539) (224) (161) (642) (45) (48) (12,659)
Total (30,270) (251) (182) (657) (45) (48) (31,453)

Net derivative financial instruments cash

inflows 558 266 248 56 162 457 1,747

188 Standard Life Aberdeen 2017

Included in the above maturity profile are the following cash flows in relation to cash flow hedge liabilities:
Within 1 2-5 6-10 11-15 16-20 Greater than
year years years years years 20 years Total
2017 £m £m £m £m £m £m £m
Cash inflows 36 94 118 566 – – 814
Cash outflows (30) (73) (91) (578) – – (772)
Net cash flow hedge cash inflows/(outflows) 6 21 27 (12) – – 42

Cash inflows and outflows are presented on a net basis where the Group is required to settle cash flows net.
Within 1 2-5 6-10 11-15 16-20 Greater than
year years years years years 20 years Total
2016 £m £m £m £m £m £m £m
Cash inflows

FINANCIAL INFORMATION
Derivative financial assets 23,319 448 355 172 221 744 25,259
Derivative financial liabilities 14,060 11 – – 1 – 14,072
Total 37,379 459 355 172 222 744 39,331

Cash outflows
Derivative financial assets (22,175) (2) (4) (16) (11) – (22,208)
Derivative financial liabilities (14,821) (46) (23) (14) (32) (147) (15,083)
Total (36,996) (48) (27) (30) (43) (147) (37,291)

Net derivative financial instruments cash

inflows 383 411 328 142 179 597 2,040

22. Receivables and other financial assets

2017 2016
Notes £m £m
Amounts receivable on direct insurance business 71 82
Amounts receivable on reinsurance contracts 2 1
Outstanding sales of investment securities 125 196
Accrued income 388 223
Cancellations of units awaiting settlement 219 317
Collateral pledged in respect of derivative contracts 39 46 30
Property related assets 154 156
Contingent consideration asset 41 6 10
Other 231 240
Receivables and other financial assets 1,242 1,255

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

The amount of receivables and other financial assets expected to be recovered after more than 12 months is £85m (2016: £77m).
23. Other assets
2017 2016
£m £m
Prepayments 72 41
Other 113 53
Other assets 185 94

The amount of other assets expected to be recovered after more than 12 months is £7m (2016: £4m).

Standard Life Aberdeen 2017 189