Aviva 2007 Annual Report Download - page 119
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Please find page 119 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.(C) Critical accounting policies and the
use of estimates
The preparation of financial statements requires the Group
to select accounting policies and make estimates and
assumptions that affect items reported in the consolidated
income statement, balance sheet, other primary
statements and notes to the financial statements.
Critical accounting policies
The major areas of judgement on policy application are
considered to be over whether Group entities should be
consolidated (set out in policy D), on product classification
(set out in policy F) and in the classification of financial
investments (set out in policy S).
Use of estimates
All estimates are based on management’s knowledge of
current facts and circumstances, assumptions based on
that knowledge and their predictions of future events and
actions. Actual results can always differ from those
estimates, possibly significantly.
The table below sets out those items we consider
particularly susceptible to changes in estimates and
assumptions, and the relevant accounting policy.
Item Accounting policy
Insurance and participating
investment contract liabilities F & K
Goodwill, AVIF and other intangible assets N
Impairment of financial investments S
Fair value of derivative financial instruments T
Deferred acquisition costs and other assets W
Provisions and contingent liabilities Z
Pension obligations AA
Deferred tax AB
Further details on the estimation of amounts for insurance
and participating investment contract liabilities are given in
notes 38, 39 and 50 to these financial statements.
(D) Consolidation principles
Subsidiaries
Subsidiaries are those entities (including Special Purpose
Entities) in which the Group, directly or indirectly, has
power to exercise control over financial and operating
policies in order to gain economic benefits. Subsidiaries are
consolidated from the date on which effective control is
transferred to the Group and are excluded from
consolidation from the date of disposal. All inter-company
transactions, balances and unrealised surpluses and deficits
on transactions between Group companies have been
eliminated.
From 1 January 2004, the date of first time adoption of
IFRS, the Group is required to use the purchase method of
accounting to account for the acquisition of subsidiaries.
Under this method, the cost of an acquisition is measured
as the fair value of assets given up, shares issued or
liabilities undertaken at the date of acquisition, plus costs
directly attributable to the acquisition. The excess of the
cost of acquisition over the fair value of the net assets of
the subsidiary acquired is recorded as goodwill (see policy
N below). Any surplus of the acquirer’s interest in the
subsidiary’s net assets over the cost of acquisition is
credited to the income statement.
Merger accounting and the merger reserve
Prior to 1 January 2004, certain significant business
combinations were accounted for using the “pooling of
interests method” (or merger accounting), which treats
the merged groups as if they had been combined
throughout the current and comparative accounting
periods. Merger accounting principles for these
combinations gave rise to a merger reserve in the
consolidated balance sheet, being the difference between
the nominal value of new shares issued by the parent
company for the acquisition of the shares of the subsidiary
and the subsidiary’s own share capital and share premium
account. These transactions have not been restated, as
permitted by the IFRS 1 transitional arrangements.
The merger reserve is also used where more than 90% of
the shares in a subsidiary are acquired and the
consideration includes the issue of new shares by the
Company, thereby attracting merger relief under the
Companies Act 1985.
Investment vehicles
In several countries, the Group has invested in a number
of specialised investment vehicles such as Open-ended
Investment Companies (OEICs) and unit trusts. These
invest mainly in equities, bonds, cash and cash equivalents,
and properties, and distribute most of their income.
The Group’s percentage ownership in these vehicles can
fluctuate from day-to-day according to the Group’s and
third party participation in them. Where Group companies
are deemed to control such vehicles, with control
determined based on an analysis of the guidance in IAS 27
and SIC 12, they are consolidated, with the interests of
parties other than Aviva being classified as liabilities. These
appear as “Net asset value attributable to unitholders” in
the consolidated balance sheet. Where the Group does
not control such vehicles, and these investments are held
by its insurance or investment funds, they do not meet the
definition of associates and are, instead, carried at fair
value through profit and loss within financial investments
in the consolidated balance sheet, in accordance with IAS
39, Financial Instruments: Recognition and Measurement.
As part of their investment strategy, the UK and certain
European long-term business policyholder funds have
invested in a number of property limited partnerships
(PLPs), either directly or via property unit trusts (PUTs),
through a mix of capital and loans. The PLPs are managed
by general partners (GPs), in which the long-term business
shareholder companies hold equity stakes and which
themselves hold nominal stakes in the PLPs. The PUTs are
managed by a Group subsidiary.
Accounting for the PUTs and PLPs as subsidiaries, joint
ventures or other financial investments depends on the
shareholdings in the GPs and the terms of each
partnership agreement. Where the Group exerts control
over a PLP, it has been treated as a subsidiary and its
results, assets and liabilities have been consolidated. Where
the partnership is managed by a contractual agreement
such that no party exerts control, notwithstanding that the
Group’s partnership share in the PLP (including its indirect
stake via the relevant PUT and GP) may be greater than
50%, such PUTs and PLPs have been classified as joint
ventures. Where the Group holds minority stakes in PLPs,
with no disproportionate influence, the relevant
investments are carried at fair value through profit and
loss within financial investments.
Aviva plc
Annual Report and
Accounts 2007
115
Financial
statements