Aviva 2009 Annual Report Download - page 133

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Performance review
Aviva plc Accounting policies continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
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 may 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.
Accounting
Item policy
Insurance and participating investment contract liabilities F & K
Goodwill, AVIF and other intangible assets N
Fair values of financial investments S
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 income taxes AB
(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 the Group no longer has
effective control. 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
statement of financial position, 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 and, from
1 October 2009, the Companies Act 2006.
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 statement of financial
position. 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 (see below) and are, instead, carried at fair value through profit and loss within
financial investments in the consolidated statement of financial position, 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
Financial statements IFRS