Aviva 2013 Annual Report Download - page 160

Aviva plc
Annual report and accounts 2013
158
Notes to the consolidated financial statements continued
17 – Goodwill continued
Long-term business
Value in use is calculated as an actuarially determined appraisal value, based on the embedded value of the business calculated in
accordance with market consistent embedded value (‘MCEV’) principles, together with the present value of expected profits from
future new business. If the embedded value of the business tested is sufficient to demonstrate goodwill recoverability on its own,
then it is not necessary to estimate the present value of expected profits from future new business.
If required, the present value of expected profits arising from future new business written over a given period is calculated on
an MCEV basis, using profit projections based on the most recent three year business plans approved by management. These plans
reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the
relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality,
morbidity and persistency.
Future new business profits for the remainder of the given period beyond the initial three years are extrapolated using a steady
growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant
available market statistics.
Expected profits from future new business are discounted using a risk adjusted discount rate. 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 for new
business may differ from that assumed.
The recoverable amounts of businesses classified as held for sale was assessed based on the fair value less costs of disposal of
the business, based on the expected net disposal proceeds of the businesses.
Key Assumptions
Embedded value basis
Future new business
profits
g
rowth rate
Future new business
profits discount rate
2013 2012 2013
%
2012
%
2013
%
2012
%
Italy long-term business MCEV MCEV 2.0 2.0 10.5 10.6
Spain long-term business MCEV MCEV 1.5 0.0 10.0 7.9
General insurance, health, fund management and other businesses
Value in use is calculated as the discounted value of expected future profits of each business. The calculation uses cash flow
projections based on business plans approved by management covering a three-year period. These plans reflect management’s
best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit.
The underlying assumptions of these projections include market share, customer numbers, premium rate and fee income changes,
claims inflation and commission rates.
Cash flows beyond that three-year period are extrapolated using a steady growth rate. Growth rates and expected future
profits are set with regards to past experience and relevant available market statistics.
Future profits are discounted using a risk adjusted discount rate.
Key assumptions
Extrapolated future profits
g
rowth rate Future profits discount rate
2013
%
2012
%
2013
%
2012
%
United Kingdom general insurance and health 1.3 1.3 7.7 8.0
Ireland general insurance and health 1.3 2.0 8.4 10.6
Italy general insurance and health 2.0 2.0
–
3.0 8.7
–
10.2 9.0
–
11.4
Aviva Investors 3.0 3.0 17.0 17.0
France – indefinite life intangible asset
The recoverable amount of the indefinite life intangible asset has been assessed based on the fair value less costs to sell of the
cash-generating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of
Aviva’s share of the subsidiary to which it relates.
Results of impairment testing
The goodwill associated with the Spanish long-term cash generating unit was reviewed in the first half of the year due to the
continued volatility in the Spanish economy, in accordance with accounting policy O. As a result, management concluded that the
goodwill was no longer fully recoverable. An impairment of £18 million was recognised in the first half of the year reducing the
carrying value of this cash generating unit to its recoverable amount reflecting a reduction to management’s estimates due to
prevailing economic circumstances. Subsequently, management reviewed the goodwill at 31 December 2013 and concluded that
no further impairment was required as the recoverable amount exceeded the carrying amount.
Similarly, as a result testing of the Italian long-term and general insurance cash generating unit, impairments of £21 million and
£9 million respectively have been recognised.
Other than the CGUs noted above, the recoverable amount exceeds the carrying value of the cash generating units
including goodwill.