Aviva 2005 Annual Report Download - page 82

Aviva plc 2005 Financial statements
Financial statements continued
Accounting policies continued
duties. Where policies lapse due to non-receipt of premiums, then
all the related premium income accrued but not received from the
date they are deemed to have lapsed is offset against premiums.
General insurance and health premiums written reflect business
incepted during the year, and exclude any sales-based taxes or
duties. Unearned premiums are those proportions of the premiums
written in a year that relate to periods of risk after the balance
sheet date. Unearned premiums are computed principally on
either a daily or monthly pro rata basis. Premiums collected by
intermediaries, but not yet received, are assessed based on
estimates from underwriting or past experience, and are included
in premiums written.
Deposits collected under investment contracts without a
discretionary participating feature (non-participating contracts) are
not accounted for through the income statement, except for the
fee income (covered in policy 4) and the investment income
attributable to those contracts, but are accounted for directly
through the balance sheet as an adjustment to the investment
contract liability.
(G) Other investment contract fee revenue
Investment contract policyholders are charged fees for mortality,
policy administration, investment management, surrenders or other
contract services. These fees are recognised as revenue in the period
in which they are collected unless they relate to services to be
provided in future periods. Amounts are considered to be assessed
when the policyholder’s balance has been adjusted for those fees.
If the fees are for services to be provided in future periods, then
they are deferred and recognised as the service is provided.
Initiation and other “front-end” fees (fees that are assessed against
the policyholder balance as consideration for origination of the
contract) are charged on some non-participating investment and
investment fund management contracts. Where the investment
contract is recorded at amortised cost, these fees are deferred and
recognised over the term of the policy by an adjustment to the
effective yield. Where the investment contract is measured at fair
value, the front-end fees that relate to the provision of investment
management services are deferred and recognised as the services
are provided.
(H) Other fee and commission income
Other fee and commission income consists primarily of investment
fund management fees, distribution fees from mutual funds,
commission revenue from the sale of mutual fund shares, and
transfer agent fees for shareholder record keeping. Revenue from
investment management fees, distribution fees and transfer agent
fees is recognised when earned. Reinsurance commissions
receivable and other commission income are recognised on the
trade date.
(I) Net investment income
Investment income consists of dividends, interest and rents
receivable for the year, movements in amortised cost on debt
securities, realised gains and losses, and unrealised gains and losses
on FV investments (as defined in policy R). Dividends on equity
securities are recorded as revenue on the ex-dividend date. Interest
income is recognised as it accrues, taking into account the effective
yield on the investment. It includes the interest rate differential on
forward foreign exchange contracts. Rental income is recognised on
an accruals basis.
The realised gain or loss on disposal of an investment is the
difference between the proceeds received, net of transaction costs,
and its original cost or amortised cost as appropriate. Unrealised
gains and losses represent the difference between the carrying
value at the year end and the carrying value at the previous year
end or purchase value during the year, less the reversal of previously
recognised unrealised gains and losses in respect of disposals made
during the year.
The long-term nature of much of the Group’s operations means
that, for management’s decision-making and internal performance
management, short-term realised and unrealised investment gains
and losses are treated as non-operating items. The Group focuses
instead on an operating profit measure that incorporates a longer
term return on investments supporting its general insurance and
health business. Total investment income, including realised and
unrealised gains, is therefore analysed between that calculated
using a longer term return and short-term fluctuations from this.
Further details of this analysis and the assumptions used are given
in note 8.
(J) Insurance and participating investment contract liabilities
Claims
Long-term business claims reflect the cost of all claims arising
during the year, including claims handling costs, as well as
policyholder bonuses accrued in anticipation of bonus declarations.
General insurance and health claims incurred include all losses
occurring during the year, whether reported or not, related
handling costs, a reduction for the value of salvage and other
recoveries, and any adjustments to claims outstanding from
previous years.
Claims handling costs include internal and external costs incurred in
connection with the negotiation and settlement of claims. Internal
costs include all direct expenses of the claims department and any
part of the general administrative costs directly attributable to the
claims function.
Long-term business provisions
Under current IFRS requirements, insurance and participating
investment contract liabilities are measured using accounting
policies consistent with those adopted previously under existing
accounting practices, with the exception of liabilities remeasured
to reflect current market interest rates and those relating to UK
with-profit contracts. In certain cases, shadow adjustments to the
liabilities or related deferred acquisition costs are recognised directly
in equity so that unrealised gains or losses on assets that are
recognised directly in equity affect the measurement of the liability
or related deferred acquisition costs in the same way as realised
gains or losses. From 31 December 2004, the Group has adopted
FRS 27, Life Assurance, for liabilities relating to such contracts. FRS
27 adds to the requirements of IFRS but does not vary them in any
way, and further details are given in policy A above.
The long-term business provisions are calculated separately for each
life operation, based on local regulatory requirements and actuarial
principles consistent with those applied in the UK. Each calculation
represents a determination within a range of possible outcomes,
where the assumptions used in the calculations depend on the
circumstances prevailing in each life operation. The principal
assumptions are disclosed in note 35(b). For liabilities of the UK
with-profit fund, FRS 27 requires liabilities to be calculated as the
realistic basis liabilities as set out by the UK’s Financial Services
Authority, adjusted to remove the shareholders’ share of future
bonuses.
Present value of future profits (PVFP) on non-participating
business written in a with-profit fund
For with-profit life funds falling within the scope of the FSA realistic
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