Aviva 2013 Annual Report Download - page 114

Aviva plc
Annual report and accounts 2013
112
Accounting policies continued
(v) Amendments to IAS 19, Employee Benefits
These narrow scope amendments simplify accounting for
contributions from employees or third parties to defined
benefit plans. They are not expected to have significant
implications for the Group’s consolidated financial
statements. The amendments have yet to be endorsed
by the EU.
(vi) Improvements to IFRSs 2010-2012 and 2011-2013
These improvements to IFRSs consist of amendments to
nine IFRSs. The amendments clarify existing guidance and
do not give rise to significant changes in existing
accounting practice. The improvements have yet to be fully
assessed but are not expected to have significant
implications for the Group’s consolidated financial
statements. The amendments have yet to be endorsed
by the EU.
(vii) IFRS 9, Financial Instruments
IFRS 9 will replace IAS 39 Financial Instruments:
Recognition and Measurement. Under IFRS 9, all
recognised financial assets that are currently within the
scope of IAS 39 will be measured at either amortised cost
or fair value. The basis of classification will depend on the
business model and the contractual cash flow
characteristics of the financial asset. All equity instruments
will be measured at fair value. A debt instrument is
measured at amortised cost only if it is held to collect the
contractual cash flows and the cash flows represent
principal and interest, otherwise it is measured at fair value
through profit or loss (FVTPL). For financial liabilities
designated as at FVTPL, the change in the fair value
attributable to changes in the liability’s credit risk is
recognised in other comprehensive income unless it gives
rise to an accounting mismatch in profit or loss.
The IASB has issued new hedge accounting
requirements, aligning these more closely with an entity’s
risk management activities. In addition, the IASB published
amendments to IFRS 9, removing the mandatory effective
date of 1 January 2015 and allowing an entity to early
adopt the requirements to recognise changes in fair value
from an entity’s own credit risk in OCI without having to
adopt the whole standard.
We have not yet completed our assessment of the
impact of the adoption of IFRS 9 on the Group which, to a
large extent, will need to take into account the finalisation
of the standard and the interaction of the requirements of
IFRS 9 with the IASB’s ongoing insurance contracts
accounting project. IFRS 9 has not yet been endorsed by
the EU.
(B) Operating profit
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 (also
referred to as adjusted operating profit) that incorporates an
expected return on investments supporting its long-term and
non-long-term businesses. Operating profit for long-term
business is based on expected investment returns on financial
investments backing shareholder and policyholder funds over
the reporting period, with allowance for the corresponding
expected movements in liabilities. Variances between actual and
expected investment returns, and the impact of changes in
economic assumptions on liabilities, are disclosed separately
outside operating profit. For non-long-term business, the total
investment income, including realised and unrealised gains, is
analysed between that calculated using a longer-term return
and short-term fluctuations from that level. Further details of
this analysis and the assumptions used are given in notes 9 and
10. Operating profit also excludes impairment of goodwill,
associates and joint ventures; amortisation and impairment of
other intangibles; the profit or loss on disposal and
remeasurement of subsidiaries, joint ventures and associates;
integration and restructuring costs; and exceptional items.
Exceptional items are those items that, in the Directors’ view,
are required to be separately disclosed by virtue of their nature
or incidence to enable a full understanding of the Group’s
financial performance. Details of these items are provided in the
relevant notes.
(C) Critical accounting policies and the use
of estimates
The preparation of financial statements requires the Group to
select accounting policies and make estimates and assumptions
that affect items reported in the consolidated income
statement, consolidated statement of financial position, other
primary statements and notes to the consolidated financial
statements.
Critical accounting policies and the use of estimates
These major areas of judgement on policy application are
summarised below:
Item
Critical accounting judgement, estimate
or assumption
Accounting
policy
Consolidation Assessment of whether the
Group controls the underlying
entities
D
Insurance and participating
investment contract
liabilities
Assessment of the significance
of insurance risk passed
G
Financial investments Classification of investments T
All estimates are based on management’s knowledge of current
facts and circumstances, assumptions based on that knowledge
and their predictions of future events and actions. Actual results
may differ from those estimates, possibly significantly.
The table below sets out those items we consider particularly
susceptible to changes in estimates and assumptions, and the
relevant accounting policy.
Item
Accounting
policy
Insurance and participating investment contract liabilities G&L
Goodwill, AVIF and intangible assets O
Fair values of financial investments F&T
Impairment of financial investments T
Fair value of derivative financial instruments F&U
Deferred acquisition costs and other assets X
Provisions and contingent liabilities AA
Pension obligations AB
Deferred income taxes AC
Operations held for sale AH
(D) Consolidation principles
Subsidiaries
Subsidiaries are those entities over which the Group has control.
The Group controls an investee if and only if the Group has all
of the following:
 power over the investee,
 exposure, or rights, to variable returns from its involvement
with the investee, and
 the ability to use its power over the investee to affect its
returns.
The Group considers all relevant facts and circumstances in
assessing whether it has power over an investee, including:
the purpose and design of an investee, relevant activities,
substantive and protective rights, and voting rights and
potential voting rights.