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## 2.35 Future adoption of voluntary changes in accounting policies 

Aegon will make voluntary changes in accounting policies, effective January 1, 2014 which will be applied retrospectively for all periods presented. Changes to these policies relate to deferred policy acquisition costs and how Aegon accounts for longevity assumptions in the Netherlands. In the paragraphs below, details are provided for these changes in accounting policies. 

## Deferred policy acquisition costs 

Aegon will adopt a single group-wide accounting policy for deferral of policy acquisition costs as of January 1, 2014. Upon initial adoption of IFRS, Aegon operations were permitted to continue existing accounting policies for insurance contracts even though such policies were often non-uniform between countries. Through adoption of a uniform, group-wide accounting policy, Aegon will eliminate this lack of uniformity for the deferral of policy acquisition costs thereby providing the users of the financial statements with more meaningful information. 

IFRS 4 neither prohibits nor requires the deferral of policy acquisition costs, nor does it prescribe what acquisition costs are deferrable. Thus, in developing the new policy, Aegon considered and sought alignment with the proposed description of deferrable policy acquisition costs within the IFRS Insurance Contracts Phase II exposure draft (Exposure Draft). In the absence of detailed guidance in the Exposure Draft, Aegon also considered the recently adopted guidance in U.S. GAAP (ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts”), if not conflicting with IFRS 4 or the Exposure Draft. IFRS currently differs from US GAAP by not limiting the deferral to expenses from successful efforts only and in the detail of how that principle is applied. Under the new accounting policy, deferred policy acquisition costs include costs that are directly attributable to the acquisition or renewal of insurance contracts. The previous accounting policy was based on a broader definition of costs that could be deferred. 

The adoption of the new accounting policy for deferred policy acquisition costs is expected to decrease shareholders' equity at the date of adoption (January 1, 2014), by between EUR 1.4 and 1.6 billion. The company estimates that this accounting change will reduce net income by approximately EUR 85 million, EUR 65 million and EUR 60 million for the years 2013, 2012 and 2011 respectively, as certain expenses are no longer deferrable and are directly accounted for in the income statement. 

## Longevity reserving 

As of January 1, 2014, Aegon will amend its policy to determine the insurance contract liability of Aegon the Netherlands to account for longevity risk assumed by Aegon. This change will provide more current information about the financial effects of changes in life expectancy of the insured population. The change will also increase alignment with market pricing of longevity risk. It will supply users of the financial statements with more relevant decision making information on the insurance contract liability and will improve transparency on the longevity risks assumed by Aegon. 

Mortality tables will be updated annually based on the prospective tables taking into account longevity trends. The new methodology will take into account the contractual cash flows related to the longevity risk assumed. Previously the methodology applied by Aegon the Netherlands only considered realized mortalities based on observed mortality tables. 

The change is expected to decrease shareholders’ equity at the date of adoption (January 1, 2014), by between EUR 0.8 and 0.9 billion. The company estimates that this change will increase net income by approximately EUR 180 million, EUR 150 million and EUR 105 million for the years 2013, 2012 and 2011 respectively. 

## 3 Critical accounting estimates and judgment in applying accounting policies 

Application of the accounting policies in the preparation of the financial statements requires management to apply judgment 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 materially from those estimates. Accounting policies that are critical to the financial statement presentation and that require complex estimates or significant judgment are described in the following sections. 

## Valuation of assets and liabilities arising from life insurance contracts 

The liability for life insurance contracts with guaranteed or fixed account terms is generally based on current assumptions or on the assumptions established at inception of the contract. All contracts are subject to liability adequacy testing which reflects management’s current estimates of future cash flows (including investment returns). To the extent that the liability is based on current assumptions, a change in assumptions will have an immediate impact on the income statement. Also, if a change in assumption results in not passing the liability adequacy test, the entire deficiency is recognized in the income statement. To the extent that the deficiency relates to unrealized gains and losses on available-for-sale investments, the additional liability is recognized in the revaluation reserve in equity. 

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