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## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

## INTRODUCTION 

These financial statements have been drawn up in accordance with the rules for financial statements of insurance companies in the Netherlands, embodied in Title 9, Book 2 of the Dutch Civil Code. A summarized consolidated income statement has been added to the required balance sheet and profit and loss account in order to present a comprehensible view of the results of the AEGON Group (AEGON). 

AEGON is exposed to a variety of risks. Some risks are related to the international nature of AEGON’s business, such as currency translation risk. Other risks include insurance related risks, such as changes in mortality and morbidity. However, the largest exposure is to changes in financial markets (i.e. interest rate, credit and equity market risks), that affect the value of the investments and technical provisions (including deferred policy acquisition costs) . 

For detailed information about risks and sensitivity of AEGON to movements in the interest rate markets, the currency markets and the equity and real estate markets, and their effects on net income and shareholders’ equity, refer to the review of risk factors on page 33 and following. 

Application of the accounting policies in the preparation of the annual accounts requires management to use judgements involving assumptions and estimates concerning future results or other developments including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ from those estimates. Accounting policies that are critical to the financial statement presentation and that require significant judgement or involve complex estimates are the policies concerning the determination of default provisions for fixed rate investments, the other than temporary impairments of equity securities, the technical provisions for life insurance including amortization of deferred policy acquisition costs, the provisions for minimum benefit guarantees, and the pension expense. For further explanation refer to the notes of the related items. 

As of the financial year 2003, the market value of stock appreciation rights is recognized as a liability in the balance sheet. Valuation is at market value with changes in the value recognized in the income statement under expenses. This accounting method is in accordance with International Reporting Standards. As the related plans had no value at year-end 2002, the application of these guidelines does not affect the comparative figures. 

As was announced in the 2002 annual report, the accounting for capital gains and losses on shares and real estate will be changed in 2004. With International Financial Reporting Standards (IFRS) becoming AEGON’s required reporting standard in 2005, AEGON has decided to discontinue the indirect income method of accounting for capital gains and losses. As of January 1, 2004, capital gains and losses will be recognized as earnings in the income statement when realized. Reported indirect income and the realized capital gains and losses for the last three years were as follows: 

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The realized portion of the revaluation account at December 31, 2003 amounting to EUR 1,281 million will be transferred directly to the surplus fund as of January 1, 2004 and the change will not have an effect on the level of shareholders’ equity. 

In these financial statements the breakdown of revenues in the income statement has been changed, showing on a separate line the revenues from the distribution and the asset management operations. This change has no effect on the financial position and results. The comparative figures have been adjusted accordingly. 

With effect from January 1, 2003, the balance sheets and income statements of the Meeùs group, consisting of intermediary and real estate management and brokerage companies, and of a number of smaller distribution companies for financial products all established in the Netherlands, have been fully consolidated. The consolidation follows on from the decision no longer to undertake efforts to achieve a business combination with third parties for these companies. 

On May 9, 2003, the extraordinary General Meeting of Shareholders approved certain changes to the corporate governance of AEGON. It was decided to no longer voluntarily apply the ”large company regime” of the Dutch corporate code, to change the relationship with Vereniging AEGON and to increase the authority of AEGON N.V.’s shareholders. One of the changes concerns the corporate body that is authorized to adopt the annual accounts. Under the new corporate governance the General Meeting of Shareholders is the body that shall adopt the annual accounts, instead of the Supervisory Board, as was the case under the ”large company regime”. Due to this change the dividend on preferred shares will not be accrued as of the end of 2003 since the liability can only be determined after the adoption of the annual accounts by the General Meeting of Shareholders. 

On May 9, 2002, AEGON and the China National Offshore Oil Corporation (CNOOC) announced the establishment of a joint venture for life insurance activities in China. CNOOC and AEGON entered this joint venture as equal partners and each contributed 50% to the initial capital base of approximately EUR 27 million. The joint venture’s headquarters are located in Shanghai. After receiving regulatory approval operations started in 2003. 

On August 5, 2003, AEGON announced an agreement to sell most of the commercial lending business of Transamerica Finance Corporation (TFC) to GE Commercial Finance. The sale price of approximately USD 5.4 billion resulted in an after-tax book gain of around USD 200 million. On January 14, 2004, the transaction was closed and the book gain will be added directly to shareholders’ equity in 2004. Therefore the 2003 annual accounts fully include on a non-consolidated basis the assets, liabilities and results for these businesses. 

