Aviva 2013 Annual Report Download - page 115

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
113
Accounting policies continued
The group re-assesses whether or not it controls an investee if
facts and circumstances indicate that there are changes to one
or more of the three elements of control. Subsidiaries are
consolidated from the date the Group obtains control and are
excluded from consolidation from the date the Group loses
control. All inter-company transactions, balances and unrealised
surpluses and deficits on transactions between Group
companies have been eliminated. Accounting policies of
subsidiaries are aligned on acquisition to ensure consistency
with the Group policies.
The Group is required to use the acquisition method of
accounting for business combinations. Under this method, the
cost of an acquisition is measured as the aggregate of the
consideration transferred, measured at acquisition date fair
value, and the amount of any non-controlling interest in the
acquiree. For each business combination, the Group has the
option to measure the non-controlling interest in the acquiree
either at fair value or at the proportionate share of the
acquiree’s identifiable net assets. The excess of the
consideration transferred over the fair value of the net assets of
the subsidiary acquired is recorded as goodwill (see accounting
policy O below). Acquisition-related costs are expensed as
incurred. Transactions that do not result in a loss of control are
treated as equity transactions with non-controlling interests.
Merger accounting and the merger reserve
Prior to 1 January 2004, the date of first time adoption of IFRS,
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 gave rise
to a merger reserve in the consolidated statement of financial
position, being the difference between the nominal value of
new shares issued by the Parent Company for the acquisition of
the shares of the subsidiary and the subsidiary’s own share
capital and share premium account. 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 and,
from 1 October 2009, the Companies Act 2006.
Investment vehicles
In several countries, the Group has invested in a number of
specialised investment vehicles such as Open-ended Investment
Companies (OEICs) and unit trusts. These invest mainly in
equities, bonds, cash and cash equivalents, and properties, and
distribute most of their income. The Group’s percentage
ownership in these vehicles can fluctuate from day to day
according to the Group’s and third-party participation in them.
When assessing control over investment vehicles, the Group
considers the scope of its decision-making authority including its
ability to direct the relevant activities of the fund and exposure
to variability of returns from the perspective of an investor in the
fund and of the asset manager. In addition, the Group assesses
rights held by other parties including substantive removal rights
that may affect the Group’s ability to direct the relevant
activities and indicate that the group does not have power.
Where Group companies are deemed to control such vehicles,
they are consolidated, with the interests of parties other than
Aviva being classified as liabilities. These appear as ‘Net asset
value attributable to unitholders’ in the consolidated statement
of financial position. Where the Group does not control such
vehicles, and these investments are held by its insurance or
investment funds, they are carried at fair value through profit or
loss within financial investments in the consolidated statement
of financial position.
As part of their investment strategy, the UK and certain
European long-term business policyholder funds have invested
in a number of property limited partnerships (PLPs), either
directly or via property unit trusts (PUTs), through a mix of
capital and loans. The PLPs are managed by general partners
(GPs), in which the long-term business shareholder companies
hold equity stakes and which themselves hold nominal stakes in
the PLPs. The PUTs are managed by a Group subsidiary.
Accounting for the PUTs and PLPs as subsidiaries, joint
ventures, associates or other financial investments depends on
whether the Group is deemed to have control or joint control
over the PUTs and PLPs’ shareholdings in the GPs and the terms
of each partnership agreement are considered along with other
factors that determine control, as outlined above. Where the
Group exerts control over a PUT or a PLP, it has been treated as
a subsidiary and its results, assets and liabilities have been
consolidated. Where the partnership is managed by an
agreement such that there is joint control between the parties,
notwithstanding that the Group’s partnership share in the PLP
(including its indirect stake via the relevant PUT and GP) may
be greater than 50%, such PUTs and PLPs have been classified
as joint ventures. Where the Group has significant influence
over the PUT or PLP, as defined in the following section, the
PUT or PLP is classified as an associate. Where the Group
holds non-controlling interests in PLPs, with no significant
influence or control over their associated GPs, the relevant
investments are carried at fair value through profit or loss within
financial investments.
Associates and joint ventures
Associates are entities over which the Group has significant
influence. Significant influence is the power to participate in the
financial and operating policy decisions of the investee, but is
not control or joint control. Generally, it is presumed that the
Group has significant influence if it has between 20% and 50%
of voting rights. Joint ventures are joint arrangements whereby
the Group and other parties that have joint control of the
arrangement have rights to the net assets of the joint venture.
Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the
relevant activities require unanimous consent of the parties
sharing control. In a number of these, the Group’s share of 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 are also
eliminated, unless the transaction provides evidence of an
impairment of the asset transferred between entities.
Other than investments in investment vehicles which are
carried at fair value through profit or loss, 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’s share of that entity’s post-acquisition changes to
shareholders’ funds, is included as an asset in the consolidated
statement of financial position. As explained in accounting
policy O, the cost includes goodwill identified on acquisition.
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 or joint control 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.