Aviva 2005 Annual Report Download - page 102

Financial statements continued
Notes to the consolidated financial statements continued
1 – First time adoption of International Financial Reporting Standards continued
(3) Employee benefits
a) Pensions Under the Group’s UK GAAP pension policy, as set out in Statement of Standard Accounting Practice 24, Accounting for
Pension Costs (SSAP 24), the cost of providing pension benefits is expensed using actuarial valuation methods which give a substantially
even charge over the expected service lives of employees, and results in either a prepayment or an accrual to the extent that this charge
does not equate to the cash contributions made into the schemes. Under IAS 19, Employee Benefits, the projected benefit obligation is
matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the pension
expense for the year. Any pension asset or obligation must be recorded in the balance sheet. Aviva has not applied the “corridor
approach” to valuing pension deficits.
This change in accounting has resulted in the removal of the Group’s SSAP 24 balances, a net debtor of £251 million after allowing for
deferred tax, at 1 January 2004 (31 December 2004: £279 million) and the recognition of a deficit of £583 million (31 December 2004:
£630 million), net of deferred tax, valued in accordance with IAS 19. This gives an overall impact on shareholders’ funds of £834 million
at 1 January 2004 and £909 million at 31 December 2004.
The Group has assumed that substantially all of the pension deficit will fall to be borne by the shareholders. This is particularly relevant
to the UK pension scheme deficit, which forms the majority of the deficit recognised by the Group. Costs, including pension costs, are
charged to the UK Life companies and with-profit funds on the basis of a pre-determined Management Services Agreement (MSA).
As reported at the time of the conversion to EEV, where similar assumptions have been made in connection with deficit funding, under
the MSA, NU Life Services Limited can renegotiate the terms relating to the recharging of the costs to the UK with-profit fund in 2008,
subject to regulatory approval. In evaluating the impact on IFRS, Aviva has not sought to pre-empt the outcome of this renegotiation.
Any changes to the recharges in respect of the pension deficit will be credited to equity in the period agreement is obtained.
In some countries, the pension schemes have invested in the Group’s long-term business funds. IAS 19 requires the liquidity of the
schemes’ assets to be considered and, if these are deemed non-transferable, the presentation of the total obligation to the schemes
must include these amounts. Accordingly, insurance liabilities have been reduced by £715 million at 1 January 2004 (£813 million at
31 December 2004) and provisions increased by the same amounts, to reflect this disclosure. There is no impact on equity or income
arising from this presentation.
There are a number of adjustments impacting the Group’s “Provisions” line. However, the most significant adjustment relates to the
recognition of the pension obligations as shown in the table below:
1 January 31 December
2004 2004
£m £m
Provisions as stated under UK GAAP 336 340
Less: SSAP 24 pension obligation (78) (63)
Deficit in the staff pension schemes 838 893
Other obligations to staff pension schemes – insurance policies issued by Group companies 715 813
Total IAS 19 obligations to staff pension schemes 1,553 1,706
Adjustments to other provisions arising under IFRS 111 142
Provisions as stated under IFRS 1,922 2,125
b) Equity compensation plans Under UK GAAP, the costs of awards to employees under equity compensation plans, other than the Save
As You Earn plans, are recognised immediately if they are not conditional on performance criteria. If the award is conditional upon future
performance criteria, the cost is recognised over the period to which the employee’s service relates. The minimum cost for the award is
the difference between the fair value of the shares at the date of grant less any contribution required from employee or exercise price.
The cost is based on a reasonable expectation of the extent that the performance criteria will be met. Any subsequent changes in that
expectation are reflected in the income statement as necessary.
Under IFRS 2, Share-based Payment, compensation costs for equity compensation plans that were granted after 7 November 2002, but
had not yet vested at 1 January 2005, are determined based on the fair value of the share-based compensation at grant date, which is
recognised in the income statement over the period of the expected life of the share-based instrument.
This change in accounting has not resulted in any material changes to the balance sheets at 1 January 2004 or 31 December 2004.
Aviva plc 2005 Financial statements
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