Aviva 2007 Annual Report Download - page 67
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Please find page 67 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.International Financial Reporting
Standards (IFRS)
Our consolidated financial statements are prepared
under IFRS, using standards issued by the International
Accounting Standards Board (IASB) and endorsed
by the EU. In addition to fulfilling this legal obligation,
the group has also complied with IFRS as issued by
the IASB and applicable at 31 December 2007.
The financial data contained in the report and
accounts has been prepared using the group’s accounting
policies set out on pages 114 to 125. Where applicable,
the financial statements have also been prepared in
accordance with the Statement of Recommended Practice
(SORP) on accounting for insurance business issued by
the Association of British Insurers (ABI) in December 2005,
as amended in December 2006.
Following a review of certain balance sheet items,
we have restated the 2006 comparative figures to
gross up for cash collateral items and to reclassify certain
certificates of deposit. Details are given in note 2 to the
financial statements.
European Embedded Value (EEV)
basis of reporting
We present the results and financial position of our
life and related businesses on an EEV basis, in addition
to the IFRS basis. The directors consider that the EEV
methodology represents a more meaningful basis
of reporting the underlying value of the Group’s life
and related businesses and the underlying drivers of
performance than IFRS methodology. This basis allows
for the impact of uncertainty in the future investment
returns more explicitly and is consistent with the way
the business is priced and managed.
The EEV methodology adopted is in accordance
with the EEV Principles introduced by the CFO Forum
in May 2004, and updated in October 2005. Under the
EEV methodology, the total profit recognised over the
full lifetime of an insurance policy is the same as under
the IFRS basis of reporting. However, the EEV basis
gives a fairer indication of the profitability of business
on inception. Additionally, shareholders’ funds on an
EEV basis incorporate internally generated additional
value of in-force business (AVIF), which is excluded
for IFRS reporting. Our incentive schemes and internal
management reporting are largely aligned to the EEV
basis. These financial statements include supplementary
information on EEV reporting in the “Alternative method
of reporting long-term business” section.
Longer term investment return
The long-term nature of most of our operations means
that short-term realised and unrealised gains and losses
are shown as an adjustment to operating profit. We focus
instead on operating profit incorporating a longer term
investment return (LTIR). Our rates of return that we
use for equity and property in our LTIR methodology
are aligned with the rates that we use under EEV
principles. For fixed interest securities, we include
the amortisation of premiums or discounts arising on
purchase, thereby producing an LTIR that is equivalent
to the gross redemption yield.
Previously this methodology has been applied to our
general insurance and health businesses but following the
adoption of a new operating profit definition in November
2007, this has been extended to our long-term savings
business. Further details of this change are set out in note
2 to the financial statements on page 132.
Critical accounting policies
and 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. These are set out on pages 114 to 125.
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 that 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
Future accounting developments
We continue to take an active role in the development
of new accounting standards, via industry forums and
working parties, and reviewing and providing comment
on proposals from the IASB. Phase II of the IASB’s project
on insurance contracts remains the most significant
area of development to us. We fully support the
timely development of a global standard for insurance
accounting that reflects the economics of our business.
A discussion paper setting out the IASB’s preliminary
view was published in May 2007 and we responded both
directly and through the CFO Forum of leading European
insurers, in which we play an active role. This is the first
stage in the development of the IASB’s standard and
it is unlikely to be finalised before the end of 2010 at the
earliest. These developments are still at a relatively early
stage so it is too soon to assess the impact this change
in accounting will have. While this standard is under
development, we will continue to focus on EEV as the best
measure of value for our long-term business. We continue
to monitor other major IASB projects including financial
statement presentation, liabilities, revenue recognition
and fair value measurement.
Aviva plc
Annual Report and
Accounts 2007
Accounting basis of preparation
63
Business
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