Aviva 2009 Annual Report Download - page 67

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Performance review
Aviva plc
Corporate responsibility
Governance
Accounting basis of preparation
Annual Report and Accounts 2009
Accounting basis of preparation
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 2009.
The financial data contained in the report and accounts has
been prepared using the group’s accounting policies set out on
pages 130 to 142. 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), the
most recent version of which was issued in December 2005 and
amended in December 2006.
Following a review of our accounting policy for cash and
cash equivalents, we have restated the 2007 and 2008
comparative figures to avoid any ambiguity over the maturity
dates of these financial instruments. We have also corrected
some errors made in previous years in reporting pension
obligations in our Dutch subsidiary. Details are given in
“Financial statements IFRS – Note 2 – Presentation changes”.
Market Consistent Embedded Value (MCEV) basis
of reporting
We present the results and financial position of our life and
related businesses on an MCEV basis, in addition to the IFRS
basis. MCEV methodology represents a more meaningful basis
of reporting the value of the group’s life and related businesses
and the drivers of performance than IFRS methodology. This
basis values cashflow from assets consistently with market prices
and is consistent with the way pricing is assessed and the
business is managed.
The MCEV methodology adopted is in accordance with the
MCEV Principles published by the CFO Forum in June 2008,
with the exception of the use of an adjusted risk-free yield due
to current market conditions for immediate annuities in the UK
and Netherlands and for all US contracts. Under the MCEV
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 MCEV basis gives a fairer indication of
the profitability of business on inception. Additionally,
shareholders’ funds on an MCEV 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 focused broadly evenly between IFRS
and MCEV performance. These financial statements include
supplementary information on MCEV reporting in the
“Alternative method of reporting long-term business” section.
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
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 MCEV 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.
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, consolidated statement of financial position, other
primary statements and notes to the financial statements. These
are set out on pages 130 to 142.
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.
Performance review