Aviva 2005 Annual Report Download - page 81

Financial statements
Aviva plc 2005
Any surplus of the acquirer’s interest in the subsidiary’s net assets
over the cost of acquisition is credited to the income statement.
Prior to 1 January 2004, certain significant business combinations
were accounted for using the “pooling of interests method”
(or merger accounting), which treats the merged groups as if they
had been combined throughout the current and comparative
accounting periods. Merger accounting principles for these
combinations have given rise to a merger reserve in the
consolidated balance sheet. These transactions have not been
restated, as permitted by the IFRS 1 transitional arrangements.
The merger reserve is also used where more than 90% of the
shares in a subsidiary are acquired and the consideration includes
the issue of new shares by the Company, thereby attracting merger
relief under the Companies Act 1985.
Investment vehicles
Investment vehicles such as OEICs, where a Group company owns
more than 50%, are consolidated. The interests of parties other
than Aviva in such vehicles are classified as liabilities and appear as
“Net asset value attributable to unitholders” in the consolidated
balance sheet.
Associates and joint ventures
Associates are entities over which the Group has significant
influence, but which it does not control. Generally, it is presumed
that the Group has significant influence where it has between
20% and 50% of voting rights. Joint ventures are entities
whereby the Group and other parties undertake an economic
activity, which is subject to joint control arising from a contractual
agreement. In a number of these, the Group’s share of the
underlying assets and liabilities may be greater than 50% but the
terms of the relevant agreements make it clear that control is not
exercised. Such jointly-controlled entities are referred to as joint
ventures in these financial statements.
Gains on transactions between the Group and its associates and
joint ventures are eliminated to the extent of the Group’s interest in
the associates and joint ventures. Losses are also eliminated, unless
the transaction provides evidence of an impairment of the asset
transferred between entities.
Investments in associates and joint ventures are accounted for using
the equity method of accounting. Under this method, the cost of
the investment in a given associate or joint venture, together with
the Group’s share of that entity’s post-acquisition changes to
shareholders’ funds, is included as an asset in the consolidated
balance sheet. The Group’s share of their post-acquisition profits
or losses is recognised in the income statement and its share of
post-acquisition movements in reserves is recognised in reserves.
Equity accounting is discontinued when the Group no longer has
significant influence over the investment.
When the Group’s share of losses in an associate or joint venture
equals or exceeds its interest in the undertaking, the Group does
not recognise further losses unless it has incurred obligations or
made payments on behalf of the entity.
The Company’s investments
In the Company balance sheet, subsidiaries and joint ventures are
stated at their fair values, estimated using applicable valuation
models underpinned by the Company’s market capitalisation.
These investments are classified as available for sale financial assets,
with changes in their fair value being recorded in a separate
investment valuation reserve within equity.
(D) Foreign currency translation
Income statements and cash flows of foreign entities are translated
into the Group’s presentation currency at average exchange rates
for the year while their balance sheets are translated at the year-end
exchange rates. Exchange differences arising from the translation of
the net investment in foreign subsidiaries, associates and joint
ventures, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to the currency
translation reserve within equity. On disposal of a foreign entity, such
exchange differences are transferred out of this reserve and are
recognised in the income statement as part of the gain or loss on sale.
Foreign currency transactions are accounted for at the exchange
rates prevailing at the date of the transactions. Gains and losses
resulting from the settlement of such transactions, and from the
translation of monetary assets and liabilities denominated in foreign
currencies, are recognised in the income statement.
Translation differences on debt securities and other monetary
financial assets measured at fair value and designated as held at fair
value through profit or loss (FV) (see policy R) are included in foreign
exchange gains and losses in the income statement. For monetary
financial assets designated as available for sale (AFS), translation
differences are calculated as if they were carried at amortised cost
and so are recognised in the income statement, whilst foreign
exchange differences arising from fair value gains and losses are
included in the investment valuation reserve within equity.
Translation differences on non-monetary items, such as equities
which are designated as FV, are reported as part of the fair value
gain or loss, whereas such differences on AFS equities are included
in the investment valuation reserve.
(E) Product classification
Insurance contracts are defined as those containing significant
insurance risk if, and only if, an insured event could cause an insurer
to make significant additional payments in any scenario, excluding
scenarios that lack commercial substance, at the inception of the
contract. Such contracts remain insurance contracts until all rights
and obligations are extinguished or expire. Contracts can be
reclassified as insurance contracts after inception if insurance risk
becomes significant. Any contracts not considered to be insurance
contracts under IFRS are classified as investment contracts.
Some insurance and investment contracts contain a discretionary
participating feature, which is a contractual right to receive
additional benefits as a supplement to guaranteed benefits.
These are referred to as participating contracts.
As noted in policy A above, insurance contracts and participating
investment contracts in general continue to be measured and
accounted for under existing accounting practices at the date of
transition to IFRS. Accounting for insurance contracts is determined
in accordance with the Statement of Recommended Practice issued
by the Association of British Insurers in December 2005. However,
in certain businesses, the accounting policies have been changed, as
permitted by IFRS 4, to remeasure designated insurance liabilities to
reflect current market interest rates.
(F) Premiums earned
Premiums on long-term insurance contracts and participating
investment contracts are recognised as income when receivable,
except for investment-linked premiums which are accounted for
when the corresponding liabilities are recognised. For single
premium business, this is the date from which the policy is
effective. For regular premium contracts, receivables are taken at
the date when payments are due. Premiums are shown before
deduction of commission and before any sales-based taxes or
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