Aviva 2006 Annual Report Download - page 147

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 143
15 – Goodwill continued
RAC (non-insurance operations)
The recoverable amount of the RAC (non-insurance operations) has also been determined based on a value in use calculation.
The calculation uses cash flow projections based on business plans approved by management covering a three year period and a
risk adjusted discount rate of 10.27% (2005: 10.45%).Cash flows beyond that three year period have been extrapolated using a steady
2% growth rate. The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and
intangible assets with indefinite useful lives and a reasonably possible change in a key assumption will not cause the carrying value of the
cash generating unit to exceed its recoverable amount.
Key assumptions used for the calculation were:
–Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflects the
best estimate of future profits based on both historical experience and expected growth. Some of the assumptions that underline
the budgeted operating profit include market share, fee income and customer numbers.
Spain (long-term business)
The recoverable amount of the Spanish unit has been determined based on a fair value less costs to sell calculation. This calculation is an
actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected
profits from future new business. The recoverable amount significantly exceeds the carrying value of the cash generating unit including
goodwill and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed
its recoverable amount.
Key assumptions used for the calculation were:
–Embedded value represents the shareholder interest in the life business and is calculated in accordance with the European Embedded
Value (EEV) principles. The embedded value is the total of the net worth of the life business and the value of the in-force business.
The underlying methodology and assumptions have been reviewed by a firm of actuarial consultants and by the Group’sauditors;
–New business contribution represents the present value of projected future distributable profits generated from business written in a
period. This is based on business plans approved by management;
–Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on
management’s best estimate of future growth. The rate is in line with industry expectations; and
–Risk adjusted discount rate represents the rate used to discount expected profits from future new business. The discount rate is a
combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years may differ
from that assumed.
United States (long-term business)
The carrying value of the Group’s cash-generating unit in the United States is principally represented by the former operations of AmerUs
Group Co. (AmerUs), which was acquired by the Group on 15 November 2006. The unit’scurrent business plan is consistent with the
assumptions made at the time of the acquisition in determining the appraisal value of AmerUs, which was in excess of its current carrying
value. Since the acquisition date, the assets and liabilities making up the unit have not changed significantly, and there have been no
other events which might have materially affected the recoverable amount of the unit.
Other
During the year, goodwill allocated to a long-term business cash-generating unit in Germany, Berlinische, was tested for impairment.
Following the impairment test, an impairment charge of £94 million has been recognised in the income statement. The impairment
charge arose as a result of the fall offin contribution from new business in 2006 and current adverse experience within the in-force
portfolio.