Aviva 2002 Annual Report Download - page 59

The balance on the long-term business technical account is
computed net of the total tax attributable to that business. In order
to present the profit on long-term business operations on a pre-tax
basis, this net figure is grossed up at the long-term effective rate
of tax borne by shareholders in respect of the underlying business.
This shareholder tax add-back is included in the tax charge on the
profit on ordinary activities in the non-technical account.
Provision is made for deferred tax liabilities, or credit taken for
deferred tax assets, using the liability method, on all material
timing differences, including revaluation gains and losses on
investments recognised in the profit and loss account. Deferred tax
is calculated at the rates at which it is expected that the tax will
arise and discounted to take into account the likely timing of
payments and pattern of expected realisation of investments.
The discount rates used are the post-tax yields to maturity that
could be obtained at the balance sheet date on government
bonds with maturity dates and in currencies similar to those of
the deferred tax assets or liabilities. This is a change in accounting
policy, the effects of which are detailed in note 3(a) on pages 56
and 57.
No provision is made for tax that might arise if profits retained by
overseas subsidiary and associated undertakings were remitted to
the United Kingdom, unless a binding agreement exists for the
relevant undertaking to distribute those earnings in future.
J – Goodwill
Goodwill arising on the acquisition of subsidiary undertakings
is carried on the balance sheet as a separate intangible asset.
Goodwill arising on the acquisition of associated undertakings is
included within the carrying value of associated undertakings.
All goodwill is amortised on a straight-line basis over its useful
economic life, and its carrying value is reviewed regularly for
indications of impairment. On subsequent disposal of the
underlying investment, any goodwill not yet amortised will be
taken to the profit and loss account when calculating the profit
or loss on disposal.
Goodwill arising before 1 January 1998 was eliminated against
reserves and has not been reinstated. Goodwill previously written
off to reserves will be taken back through the profit and loss
account when calculating the profit or loss on any disposal of
the underlying investment.
K – Investments
Investments are stated at their current values at the end of the
year, with the exception of most non-linked long-term business
debt securities and fixed income securities which are shown at
amortised cost, as this basis more closely corresponds with the
valuation of the relevant long-term liabilities. Current values, for
this purpose, are: stock exchange mid-market values for listed
securities; average trading prices for unlisted securities where a
market exists; and directors’ valuations for other unlisted securities,
and for mortgages and loans.
All properties are valued annually by qualified external valuers or
members of staff, at market value. No depreciation is provided on
properties held for own use since such depreciation is immaterial.
No depreciation is provided on investment properties as the
directors consider that, as these properties are held for investment,
to depreciate them would not give a true and fair view of the
Group’s financial position or results for the financial year.
L – Derivative instruments
The Group uses derivative instruments, including forward foreign
exchange contracts, interest rate swaps, futures and options
for hedging purposes. Derivative instruments are accounted for
as follows:
• forward foreign exchange contracts. The interest rate differential
is included in investment income, while the effect of the currency
movements on these contracts is treated as an exchange difference;
• cross-currency swaps related to the Group’s borrowings. These are
translated at the year end rates and included as part of borrowings;
• interest rate swaps. The interest payable and receivable is
included within investment expenses or investment income
as appropriate;
• futures contracts and purchased options. These are included
at market value and shown under the category of investments
to which the contracts relate. No adjustment is made to the
classification of existing investments to reflect the effect of the
future settlement of these transactions.
M – Consolidation of subsidiary undertakings
The results of all material subsidiary undertakings are consolidated
using audited accounts prepared to 31 December, either from
1 January or the effective date of acquisition. In the Company
balance sheet, subsidiary undertakings are stated at current
value which, for this purpose, is net asset value.
N – Participating interests, associated undertakings
and joint ventures
Participating interests are investments in which the Group has a
long-term equity holding of over 20% and not more than 50%.
Where the interests are beneficial and significant influence is
exercised, such interests are classified as associated undertakings.
The Group has also invested in a number of joint ventures, where
its share of the underlying assets and liabilities may be greater than
50% but where the terms of the relevant agreements make it clear
that control is not exercised. The appropriate proportion of the
profit or loss on ordinary activities before tax of joint ventures and
associated undertakings is shown separately in the non-technical
account, except where these investments are held by the long-term
businesses, in which case the profit is included within investment
income in the long-term technical account. The appropriate
proportion of the shareholders’ funds of joint ventures and
associated undertakings is included in the consolidated balance
sheet, with gross equity method disclosures for the former as
required by FRS9 “Associates and joint ventures”.
O – Additional value of in-force long-term business
The valuation of long-term business included in the Group’s
balance sheet comprises two elements: the net assets of the
long-term business operations, stated in accordance with United
Kingdom accounting principles; and an additional asset, called the
additional value of in-force long-term business, which is shown
separately and represents the difference between the total
embedded value of the long-term operations and their net assets
included in these accounts. Movements in the additional value of
internally-generated in-force long-term business are taken to the
revaluation reserve.
45 Aviva plc
Annual report + accounts 2002