Aviva 2007 Annual Report Download - page 125
Download and view the complete annual report
Please find page 125 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.Financial assets and liabilities are offset 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.
(S) 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 were acquired,
and is determined by local management at initial
recognition. The FV category has two subcategories –
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 T
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.
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 are estimated using
applicable price/earnings or price/cash flow ratios refined
to reflect the specific circumstances of the issuer.
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 are subsequently measured at the higher of
the expected receivable or liability under the guarantee
and the amount initially recognised less any cumulative
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 future prospects 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.
Mortgages, investment property and securitised
loans: Impairment is measured based on the present value
of expected future cash flows discounted at the effective
rate of interest of the loan, subject to the fair value of the
underlying collateral. When a loan is considered to be
impaired, the income statement is charged with the
difference between the carrying value and the estimated
recoverable amount. Interest income on impaired loans is
recognised based on the estimated recoverable amount.
Reversals of impairments are only recognised where the
decrease in the impairment can be objectively related to
an event occurring after the write-down (such as an
improvement in the debtor’s credit rating), and are not
recognised in respect of equity instruments.
(T) Derivative financial instruments
and hedging
Derivative financial instruments include foreign exchange
contracts, interest rate futures, currency and interest rate
swaps, currency and interest rate options (both written
and purchased) and other financial instruments that derive
their value mainly from underlying interest rates, foreign
exchange rates, commodity values or equity instruments.
All derivatives are initially recognised in the balance sheet
at their fair value, which usually represents their cost. They
are subsequently remeasured at their fair value, with the
method of recognising movements in this value depending
on whether they are designated as hedging instruments
and, if so, the nature of the item being hedged. Fair values
are obtained from quoted market prices or, if these are not
available, by using valuation techniques such as discounted
cash flow models or option pricing models. All derivatives
are carried as assets when the fair values are positive and
as liabilities when the fair values are negative. Premiums
paid for derivatives are recorded as an asset on the
balance sheet at the date of purchase, representing their
fair value at that date.
Derivative contracts may be traded on an exchange or
over-the-counter (OTC). Exchange-traded derivatives
are standardised and include certain futures and option
contracts. OTC derivative contracts are individually
negotiated between contracting parties and include
forwards, swaps, caps and floors. Derivatives are subject to
various risks including market, liquidity and credit
risk, similar to those related to the underlying financial
instruments.
The notional or contractual amounts associated with
derivative financial instruments are not recorded as assets
or liabilities on the balance sheet as they do not represent
the fair value of these transactions. These amounts are
disclosed in note 56.
Aviva plc
Annual Report and
Accounts 2007
121
Financial
statements