Aviva 2006 Annual Report Download - page 113

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 109
All borrowing costs are expensed as they are incurred. Repairs and
maintenance are charged to the income statement during the
financial period in which they are incurred. The cost of major
renovations is included in the carrying amount of the asset when
it is probable that future economic benefits in excess of the most
recently assessed standard of performance of the existing asset will
flow to the Group and the renovation replaces an identifiable part
of the asset. Major renovations are depreciated over the remaining
useful life of the related asset.
(O) Investment property
Investment property is held for long-term rental yields and is not
occupied by the Group. Completed investment property is stated at
its fair value, which is supported by market evidence, as assessed by
qualified external valuers or by local qualified staff of the Group in
overseas operations. Changes in fair values are recorded in the
income statement in net investment income.
(P) Impairment of non-financial assets
Property and equipment and other non-financial assets are
reviewed for impairment losses whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognised for the amount by
which the carrying amount of the asset exceeds its recoverable
amount, which is the higher of an asset’snet selling price and
value in use. For the purposes of assessing impairment, assets
are grouped at the lowest level for which there are separately
identifiable cash flows.
(Q) Derecognition and offset of financial assets and
financial liabilities
Afinancial asset (or,where applicable, a part of a financial asset or
part of a group of similar financial assets) is derecognised where:
–The rights to receive cash flows from the asset have expired;
–The Group retains the right to receive cash flows from the asset,
but has assumed an obligation to pay them in full without
material delay to a third-party under a “pass-through”
arrangement; or
–The Group has transferred its rights to receive cash flows from
the asset and has either transferred substantially all the risks
and rewards of the asset, or has neither transferred nor retained
substantially all the risks and rewards of the asset, but has
transferred control of the asset.
Afinancial liability is derecognised when the obligation under the
liability is discharged or cancelled or expires.
Financial assets and liabilities areoffset and the net amount
reported in the balance sheet when there is a legally enforceable
right to set off the recognised amounts and there is an intention
to settle on a net basis, or realise the asset and settle the
liability simultaneously.
(R) Financial investments
The Group classifies its investments as either financial assets at
fair value through profit or loss (FV) or financial assets available
for sale (AFS). The classification depends on the purpose for
which the investments wereacquired, and is determined by local
management at initial recognition. The FV category has two sub-
categories – those that meet the definition as being held for trading
and those the Group chooses to designate as FV (referred to in this
accounting policy as “other than trading”).
In general, the FV category is used as, in most cases, the Group’s
investment or risk management strategy is to manage its financial
investments on a fair value basis. Debt securities and equity
securities, which the Group buys with the intention to resell in the
short term, are classified as trading, as are non-hedge derivatives
(see policy S below). All other securities in the FV category are
classified as other than trading. The AFS category is used where the
relevant long-term business liability (including shareholders’ funds) is
passively managed.
Purchases and sales of investments are recognised on the trade
date, which is the date that the Group commits to purchase or sell
the assets, at their fair values less transaction costs. Debt securities
are initially recorded at their fair value, which is taken to be
amortised cost, with amortisation credited or charged to the
income statement. Investments classified as trading, other than
trading and AFS are subsequently carried at fair value. Changes
in the fair value of trading and other than trading investments
are included in the income statement in the period in which they
arise. Changes in the fair value of securities classified as AFS,
except for impairment losses and relevant foreign exchange gains
and losses, are recorded in a separate investment valuation reserve
within equity.
The fair values of investments are based on quoted bid prices or
amounts derived from cash flow models. Fair values for unlisted
equity securities areestimated using applicable price/earnings or
price/cash flow ratios refined to reflect the specific circumstances
of the issuer.Equity securities, for which fair values cannot be
measured reliably,are recognised at cost less impairment. When
securities classified as AFS are sold or impaired, the accumulated fair
value adjustments are transferred out of the investment valuation
reserve to the income statement.
Financial guarantees are recognised initially at their fair value.
They aresubsequently measured at the higher of the expected
receivable or liability under the guarantee and the amount initially
recognised less any accumulated amortisation.
Impairment
The Group reviews the carrying value of its investments on a regular
basis. If the carrying value of an investment is greater than the
recoverable amount, the carrying value is reduced through a charge
to the income statement in the period of impairment. The following
policies are used to determine the level of any impairment:
Listed AFS securities: The Group performs an objective review
of the current financial position and prospects of the issuer on a
regular basis, to identify whether any impairment provision is
required. This review takes into account the likelihood of the
current market price recovering to former levels.
Unlisted AFS securities: The Group considers the current financial
position of the issuer and the futureprospects in identifying the
requirement for an impairment provision.
For both listed and unlisted AFS securities identified as being
impaired, the cumulative unrealised net loss previously recognised
within the AFS reserve is transferred to realised losses for the year.