Aviva 2009 Annual Report Download - page 141

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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
Derivative instruments for hedging
On the date a derivative contract is entered into, the Group designates certain derivatives as either:
(i) a hedge of the fair value of a recognised asset or liability (fair value hedge)
(ii) a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm
commitment (cash flow hedge); or
(iii)a hedge of a net investment in a foreign operation (net investment hedge)
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the
transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk
management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of
whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and
on an ongoing basis.
Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove
to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within
equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or
occurrence of the cash flow as appropriate.
The Group discontinues hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no
longer meets the criteria for hedge accounting or the Group revokes the designation.
For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group’s risk
management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives
held for trading. Their fair value gains and losses are recognised immediately in other trading income.
(U) Loans
Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and
collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid
principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs.
These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest
rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the
mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair
value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise
arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated
using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products,
calibrated using the margins available on new lending or with reference to the rates offered by competitors. They are revalued at
each period end, with movements in their fair values being taken to the income statement.
At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and
uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk
characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the
present value of expected future cash flows discounted at the original effective interest rate of the loan, including any collateral
receivable. Subsequent recoveries in excess of the loan’s written down carrying value are credited to the income statement.
(V) Collateral
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, as well as
certain derivative contracts and loans, in order to reduce the credit risk of these transactions. Collateral is also pledged as security
for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the
counterparty.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the
statement of financial position with a corresponding liability for the repayment in financial liabilities (note 49). Non-cash collateral
received is not recognised in the statement of financial position unless the Group either sells or repledges these assets in the
absence of default, at which point the obligation to return this collateral is recognised as a liability.
Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the statement of
financial position with a corresponding receivable for its return. Non-cash collateral pledged is not derecognised from the
statement of financial position unless the Group defaults on its obligations under the relevant agreement, and therefore continues
to be recognised in the statement of financial position within the appropriate asset classification.
(W) Deferred acquisition costs and other assets
The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding
those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on
these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these
contracts is calculated in accordance with the FSA’s realistic capital regime and FRS 27. For non-participating investment and
investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to
securing an investment management service are also deferred.
Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer,
and is treated as a separate liability.
Financial statements IFRS