Aviva 2009 Annual Report Download - page 294

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Aviva plc MCEV financial statements continued
Annual Report and Accounts 2009
M1 – Basis of preparation continued
Consolidation adjustments
The effect of transactions between group life companies such as loans and reinsurance arrangements have been included in the
results split by territory in a consistent manner. No elimination is required on consolidation.
As the MCEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing
administration, investment management and other services to the group’s life companies, the equivalent profits and losses have
been removed from the relevant segment (non-insurance or fund management) and are instead included within the results of life
and related businesses. In addition, the underlying basis of calculation for these profits has changed from the IFRS basis to the
MCEV basis.
The capitalised value of the future profits and losses from such service companies are included in the embedded value and
value of new business calculations for the relevant business, but the net assets (representing historical profits and other amounts)
remain under non-insurance or fund management. In order to reconcile the profits arising in the financial period within each
segment with the assets on the opening and closing statement of financial positions, a transfer of IFRS profits from life and related
business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our
holding companies. The assessments of goodwill, intangibles and pension schemes relating to life insurance business utilise the
IFRS measurement basis.
Restatements
(i) Following a review, the scope of business using adjusted swap rates has been increased to cover all contracts that contain
features similar to immediate annuity contracts. Prior year results have been restated to include the effect of adjusting the risk
free rates on paid-up and single premium group deferred annuity business in Delta Lloyd and immediate annuities in France and
Spain. At 31 December 2008, this increased the embedded value by £467 million and increased total earnings by £234 million
in 2008. The impact of these changes by country at 31 December 2008 was Delta Lloyd (£352 million), France (£48 million) and
Spain (£67 million).
(ii) The 2008 figures for present value of new business premiums and value of new business have been restated to reclassify
premium on Annual Renewable Term (ART) business in Spain as other operating existing business variances rather than new
business. There is no impact on profit.
(iii)The 2008 embedded value has been restated for the US, primarily reflecting modelling corrections in the valuation of assets
on a market consistent basis identified in 2009.
(iv)During 2009, the Group undertook a review of our accounting policy for cash and cash equivalents. Previously, we defined
these as normally having a maturity of three months or less from date of acquisition. To avoid ambiguity, our accounting policy
has been refined to impose a cut-off date of exactly three months, allowing us to delete “normally” from the policy wording.
This refinement of policy has resulted in a reclassification of certain short-dated instruments between cash and cash equivalents
and financial investments.
The impact of this refinement has been to increase financial investments and reduce cash and cash equivalents in 2008 by
£538 million compared to the amounts previously stated. As a consequence of this, cash flows from operating activities in 2008
have decreased by £58 million, with the effect of exchange rate movements accounting for the remaining £50 million.
(v) During 2009, the Group’s Dutch subsidiary, Delta Lloyd, carried out a review of the way it had been applying IAS 19,
Employee
Benefits
, in its own financial statements where the corridor method of smoothing actuarial gains and losses in its pension
schemes is followed; in accounting for its self-insured pension obligations and intercompany eliminations; and in its reporting
to Group where the corridor accounting is reversed. The review concluded that errors had been made locally in applying IAS 19
on the transition to IFRS and in subsequent years, such that gains on certain assets had been reported in provisions, to be
released over time, rather than through other comprehensive income. The impact of correcting these errors is to reduce
provisions by £129 million as at 1 January 2008, increase deferred tax liabilities by £33 million and increase retained earnings
at that date by £96 million.
Exchange rates
The group’s principal overseas operations during the period were located within the Eurozone and the United States.
The results and cash flows of these operations have been translated at the average rates for that period and the assets and
liabilities have been translated at the period end rates. Please refer to note 1 on page 151 of the IFRS financial statements.