Aviva 2013 Annual Report Download - page 124

Aviva plc
Annual report and accounts 2013
122
Accounting policies continued
Save As You Earn plan (SAYE plan), details of which are given in
the Directors’ Remuneration Report and in note 32.
The Group accounts for options and awards under equity
compensation plans, which were granted after 7 November
2002, until such time as they are fully 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 share awards 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. In certain jurisdictions, awards must
be settled in cash instead of shares, and the credit is taken to
liabilities rather than reserves. The fair value of these cash-
settled awards is recalculated each year, with the income
statement charge and liability being adjusted accordingly.
As described in accounting policy AE below, shares
purchased by employee share trusts to fund these awards
are shown 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 share capital (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.
(AC) 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
components of other comprehensive income and equity,
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, technical
provisions and other insurance items, 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
statement of financial position date are used to value the
deferred tax assets and liabilities.
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 are
only 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 a business combination and affects
neither accounting profit nor taxable profit or loss at the time
of the transaction.
Current and deferred tax relating to items recognised in other
comprehensive income and directly in equity are similarly
recognised in other comprehensive income and directly in equity
respectively. Deferred tax related to fair value re-measurement
of available for sale investments, pensions and other post-
retirement obligations and other amounts charged or credited
directly to other comprehensive income is recognised in the
statement of financial position as a deferred tax asset or liability.
Current tax on interest paid on direct capital instruments and
fixed rate tier 1 notes is credited directly in equity.
In addition to paying tax on shareholders’ profits, the Group’s
life businesses in the UK, Ireland and Singapore 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.
(AD) Borrowings
Borrowings are classified as being for either core structural or
operational purposes. They are recognised initially at their issue
proceeds less transaction costs incurred. Subsequently, most
borrowings are stated at amortised cost, and any difference
between net proceeds and the redemption value is recognised
in the income statement over the period of the borrowings
using the effective interest rate method. All borrowing costs are
expensed as they are incurred except where they are directly
attributable to the acquisition or construction of property and
equipment as described in accounting policy P above.
Where loan notes have been issued in connection with
certain securitised mortgage loans, the Group has taken
advantage of the revised fair value option under IAS 39 to
present the mortgages, associated liabilities and derivative
financial instruments at fair value, since they are managed as a
portfolio on a fair value basis. This presentation provides more
relevant information and eliminates any accounting mismatch
which would otherwise arise from using different measurement
bases for these three items.
(AE) Share capital and treasury shares
Equity instruments
An equity instrument is a contract that evidences a residual
interest in the assets of an entity after deducting all its liabilities.
Accordingly, a financial instrument is treated as equity if:
(i) there is no contractual obligation to deliver cash or other
financial assets or to exchange financial assets or liabilities
on terms that may be unfavourable; and
(ii) the instrument is a non-derivative that contains no
contractual obligation to deliver a variable number of shares
or is a derivative that will be settled only by the Group
exchanging a fixed amount of cash or other assets for a
fixed number of the Group’s own equity instruments.
Share issue costs
Incremental external costs directly attributable to the issue of
new shares are shown in equity as a deduction, net of tax, from
the proceeds of the issue and disclosed where material.
Dividends
Interim dividends on ordinary shares are recognised in equity
in the period in which they are paid. Final dividends on these
shares are recognised when they have been approved by
shareholders. Dividends on preference shares are recognised
in the period in which they are declared and appropriately
approved.