Aviva 2006 Annual Report Download - page 116

Aviva plc
Annual Report and Accounts 2006 112
Accounting policies continued
For defined benefit plans, the pension costs are assessed using
the projected unit credit method. Under this method, the cost
of providing pensions is charged to the income statement so as
to spread the regular cost over the service lives of employees,
in accordance with the advice of qualified actuaries. The pension
obligation is measured as the present value of the estimated future
cash outflows using a discount rate based on market yields for high
quality corporate bonds. The resulting pension scheme surplus or
deficit appears as an asset or obligation in the consolidated balance
sheet. All actuarial gains and losses are recognised immediately in
equity through the Statement of recognised income and expense.
For defined contribution plans, the Group pays contributions
to publicly or privately administered pension plans. Once the
contributions have been paid, the Group, as employer, has no
further payment obligations. The Group’s contributions are charged
to the income statement in the year to which they relate and are
included in staff costs.
Other post-retirement obligations
Some Group companies provide post-retirement healthcare or other
benefits to their retirees. The entitlement to these benefits is usually
based on the employee remaining in service up to retirement age
and the completion of a minimum service period. None of these
schemes is material to the Group. The costs of the Canadian
scheme are included within those for the defined benefit pension
schemes in that country. For such schemes in other countries,
provisions are calculated in line with local regulations, with
movements being charged to the income statement within
staff costs.
Equity compensation plans
The Group offers share award and option plans over the Company’s
ordinary shares for certain employees, including a Save As You Earn
plan (SAYE plan), details of which are given in the Directors’
remuneration report and in note 28.
The Group accounts for options and awards under share equity
compensation plans, which weregranted after 7 November 2002,
until such time as they arefully vested, using the fair value based
method of accounting (the “fair value method”). Under this
method, the cost of providing equity compensation plans is based
on the fair value of the shareawards or option plans at date of
grant, which is recognised in the income statement over the
expected vesting period of the related employees and credited to
the equity compensation reserve, part of shareholders’ funds.
Shares purchased by employee share trusts to fund these awards
areshown as a deduction from shareholders’ funds at their
original cost.
When the options are exercised and new shares are issued, the
proceeds received, net of any transaction costs, are credited to
sharecapital (par value) and the balance to share premium.
Where the shares are already held by employee trusts, the net
proceeds are credited against the cost of these shares, with the
difference between cost and proceeds being taken to retained
earnings. In both cases, the relevant amount in the equity
compensation reserve is then credited to retained earnings.
(Z) Income taxes
The current tax expense is based on the taxable profits for the year,
after any adjustments in respect of prior years. Tax, including tax
relief for losses if applicable, is allocated over profits before taxation
and amounts charged or credited to reserves as appropriate.
Provision is made for deferred tax liabilities, or credit taken for
deferred tax assets, using the liability method, on all material
temporary differences between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements.
The principal temporary differences arise from depreciation of
property and equipment, revaluation of certain financial assets and
liabilities including derivative contracts, provisions for pensions and
other post-retirement benefits and tax losses carried forward; and,
in relation to acquisitions, on the difference between the fair values
of the net assets acquired and their tax base. The rates enacted or
substantively enacted at the balance sheet date are used to
determine the deferred tax.
Deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the
temporary differences can be utilised. In countries where there is a
history of tax losses, deferred tax assets areonly recognised in
excess of deferred tax liabilities if there is convincing evidence that
future profits will be available.
Deferred tax is provided on temporary differences arising from
investments in subsidiaries, associates and joint ventures, except
where the timing of the reversal of the temporary difference can
be controlled and it is probable that the difference will not reverse
in the foreseeable future.
Deferred taxes are not provided in respect of temporary differences
arising from the initial recognition of goodwill, or from goodwill for
which amortisation is not deductible for tax purposes, or from the
initial recognition of an asset or liability in a transaction which is not
abusiness combination and affects neither accounting profit nor
taxable profit or loss at the time of the transaction.
Deferred tax related to fair value re-measurement of available for
sale investments, owner-occupied properties and other amounts
taken directly to equity is recognised in the balance sheet as a
deferred tax asset or liability.
In addition to paying tax on shareholders’ profits, the Group’s life
businesses in the UK, Ireland and Australia pay tax on policyholders’
investment returns (“policyholder tax”) on certain products at
policyholder tax rates. Policyholder tax is accounted for as an
income tax and is included in the total tax expense. The Group
has decided to show separately the amounts of policyholder tax to
provide a more meaningful measure of the tax the Group pays
on its profits. In the pro forma reconciliations, operating profit has
been calculated after charging policyholder tax.
Financial statements continued