Aviva 2006 Annual Report Download - page 109

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 105
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
In several countries, the Group has invested in a number of
specialised investment vehicles such as OIECs. These invest mainly
in equities, bonds, cash and cash equivalents, and properties,
and distribute most of their income. Where Group companies
own more than 50% of such vehicles, they 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. Wherethe Group
owns less than 50% of such vehicles, its interests areincluded in
the consolidated balance sheet within financial investments as
permitted by IAS 28, Investments in Associates.
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 if 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’sshareof 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 arealso 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’sshare 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.
If 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 (AFS) 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. The cumulative translation differences were deemed to
be zero at the transition date to IFRS.
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 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 areincluded 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 areextinguished 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 areclassified 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 later of
the date of transition to IFRS or the date of the acquisition of the
entity.Accounting for insurance contracts is determined in
accordance with the Statement of Recommended Practice issued by
the Association of British Insurers in December 2005, as amended
in December 2006. However,in certain businesses, the accounting
policies or accounting estimates have been changed, as permitted
by IFRS 4 and IAS 8 respectively, to remeasure designated insurance
liabilities to reflect current market interest rates and changes to
regulatory capital requirements.