Aviva 2013 Annual Report Download - page 116

Aviva plc
Annual report and accounts 2013
114
Accounting policies continued
The Company’s investments
In the Company statement of financial position, subsidiaries,
associates 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 recognised in other
comprehensive income and recorded in a separate investment
valuation reserve within equity.
(E) 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 statements of financial
position 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 recognised in other
comprehensive income and 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 (FVTPL) (see
accounting policy T) are included in foreign exchange gains and
losses in the income statement. For monetary financial assets
designated as Available for Sale (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
recognised in other comprehensive income and included in the
investment valuation reserve within equity. Translation
differences on non-monetary items, such as equities which are
designated as FVTPL, are reported as part of the fair value gain
or loss, whereas such differences on AFS equities are included in
the investment valuation reserve.
(F) Fair value measurement
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of
whether that price is directly observable or estimated using
another valuation technique. This presumes that the transaction
takes place in the principal (or most advantageous) market
under current market conditions. Fair value is a market-based
measure and in the absence of observable market prices in an
active market, it is measured using the assumptions that market
participants would use when pricing the asset or liability.
The fair value of a non-financial asset is determined based
on its highest and best use from a market participant’s
perspective. When using this approach, the Group takes into
account the asset’s use that is physically possible, legally
permissible and financially feasible.
The best evidence of the fair value of a financial instrument
at initial recognition is normally the transaction price i.e. the fair
value of the consideration given or received. In certain
circumstances, the fair value at initial recognition may differ
from the transaction price. If the fair value is evidenced by
comparison with other observable current market transactions
in the same instrument (i.e. without modification or
repackaging), or is based on a valuation technique whose
variables include only data from observable markets, then the
difference between the fair value at initial recognition and the
transaction price is recognised as a gain or loss in the income
statement. When unobservable market data have a significant
impact on the valuation of financial instruments, the difference
between the fair value at initial recognition and the transaction
price is not recognised immediately in the income statement,
but deferred and recognised in the income statement on
an appropriate basis over the life of the instrument but no
later than when the valuation is supported wholly by
observable market data or the transaction is closed out
or otherwise matured.
If an asset or a liability measured at fair value has a bid price
and an ask price, the price within the bid-ask spread that is
most representative of fair value in the circumstances is used to
measure fair value.
(G) 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 are extinguished 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 are
classified as investment contracts. Some insurance and
investment contracts contain a discretionary participation
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 accounting 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, in accordance with IFRS 4.
Accounting for insurance contracts in UK companies is
determined in accordance with the Statement of Recommended
Practice issued by the Association of British Insurers, the most
recent version of which was issued in December 2005 and
amended in December 2006. 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. When
accounting policies or accounting estimates have been changed,
and adjustments to the measurement basis have occurred, the
financial statements of that year will have disclosed the impacts
accordingly. One such example is our adoption of Financial
Reporting Standard 27 Life Assurance (FRS 27) which was issued
by the UK’s Accounting Standards Board (ASB) in December
2004. Aviva, along with other major insurance companies and
the ABI, signed a Memorandum of Understanding with the ASB,
under which we voluntarily agreed to adopt in full the standard
from 2005 in the Group’s IFRS financial statements. FRS 27 adds
to the requirements of IFRS but does not vary them in any way.
The additional requirements of FRS 27 are detailed in
accounting policy L below and in note 57.
(H) Premiums earned
Premiums on long-term insurance contracts and participating
investment contracts are recognised as income when receivable,
except for investment-linked premiums which are accounted for
when the corresponding liabilities are recognised. For single
premium business, this is the date from which the policy is
effective. For regular premium contracts, receivables are