Aviva 2002 Annual Report Download - page 60

The additional value of in-force long-term business arising on
acquisitions is recognised in the balance sheet, and is amortised
through the profit and loss account over the useful lifetime of the
related contracts in the portfolio on a systematic basis. The rate
of amortisation is chosen by considering the profile of the
in-force business acquired and the expected depletion in its value.
The value of purchased in-force long-term business is reviewed
annually for any impairment in value and any reductions are
charged to the long-term business technical account.
The embedded value is carried at the directors’ valuation, and is
audited by the Group’s auditors. Further detail of the methodology
and assumptions is included as supplementary information on
pages 96 to 97. The embedded value is the total of the
shareholders’ net worth of the long-term operations and the
present value, at risk discount rates, of the projected releases to
shareholders arising from the business in force, less a deduction for
the effect of meeting the statutory solvency requirements of the
business. The shareholders’ net worth comprises the market value
of the shareholders’ funds and the shareholders’ interest in the
surplus held in the non-profit component of the long-term business
funds determined on a statutory solvency basis and adjusted to add
back any non-admissible assets. This effect of solvency requirements
is the difference between the nominal value of required solvency
capital and the present value, at risk discount rates, of the projected
release of this capital and investment earnings on the capital.
P – Long-term business provision and technical provision
for linked liabilities
The long-term business provision is calculated separately for each
life operation, mainly using the net premium method, based on
local actuarial principles consistent with those applied in the United
Kingdom. Each calculation represents a point within a range of
possible outcomes, and the assumptions used in the calculations
depend on the circumstances prevailing in each life operation.
The principal assumptions are given in note 38.
Within the long-term business provision, explicit allowance is made
for vested bonuses, including those added following the current
valuation, but not generally for future reversionary or terminal
bonuses. The provisions held for linked business and unitised with
profits business are the unit liabilities together with certain non-
unit provisions.
Q – Tangible assets
Computer equipment, motor vehicles and other tangible assets
are capitalised at cost and depreciation is charged to the profit
and loss account, within expenses on a straight-line basis, over
their estimated useful lives of between three and five years.
Assets acquired under finance leases are capitalised and charged
to the profit and loss account over the shorter of the term of the
leases or their estimated useful lives, subject to a maximum of five
years. All tangible assets are tested for impairment where events or
changes in circumstances indicate that the carrying amount may
not be recoverable. Impairment losses are included within the
cumulative depreciation amounts disclosed.
R – Subordinated debt and debenture loans
Subordinated debt and borrowings issued at a discount are
included in the balance sheets at their proceeds, net of other
expenses, together with amortised discount to the balance sheet
date. The discount, amortised on a compound basis, and expenses
are charged to loan interest in the profit and loss account over the
term of the instrument.
S – Fund for future appropriations
The fund for future appropriations is used in conjunction with
long-term business where the nature of the policy benefits is such
that the division between shareholder reserves and policyholder
liabilities is uncertain. Amounts whose allocation either to
policyholders or shareholders has not been determined by the end
of the financial year are held in the fund for future appropriations.
Transfers between the fund for future appropriations and the
long-term business technical account represent changes in the
unallocated amounts between balance sheet dates.
T – Equalisation provision
Provision is made in the Group accounts for the equalisation
provisions established, where required, in the accounts of individual
insurance companies in the United Kingdom and in a limited
number of countries overseas. The provision is required by law
even though no actual liability exists at the balance sheet date.
U – Exchange rates
The results of foreign enterprises are translated into sterling
at average exchange rates while their assets and liabilities are
translated at year end rates. The resulting exchange differences
arising within long-term businesses are included within the
long-term business technical account and form part of the transfer
to the fund for future appropriations, while those arising within
other businesses are taken directly to reserves.
Transactions denominated in foreign currencies are translated
at the exchange rate at the date of transaction. Foreign currency
assets and liabilities held at the year end are translated at year
end rates of exchange. The resulting exchange gains or losses are
included in the profit and loss account.
V – Share-based compensation
The Group offers share award and option plans over the
Company’s ordinary shares for certain employees, including a
Save As You Earn plan (“SAYE plan”), details of which are given
in the Directors’ remuneration report on pages 35 to 42.
Compensation costs for non-SAYE plans are based on the market
price of the shares when purchased by an employee share trust,
less any amounts paid or payable by employees in respect of the
awards. These costs are charged to the profit and loss account over
the periods during which the share awards or options are earned.
For the SAYE plan, shares are issued to a qualifying share
ownership trust, with the excess of the market price subscribed at
the date of transfer by the trust over the nominal value being
recorded in the Company’s share premium account. The difference
between the market price at the date of transfer to the trust and
the exercise price payable by employees is charged to the
Company’s profit and loss account or, in the consolidated group
accounts, directly to the profit and loss account reserve.
Accounting policies continued
46 Aviva plc
Annual report + accounts 2002