Aviva 2013 Annual Report Download - page 122

Aviva plc
Annual report and accounts 2013
120
Accounting policies continued
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.
Changes in the fair value of derivatives that are designated
and qualify as fair value hedges are recognised in the income
statement. The gain or loss on the hedged item that is
attributable to the hedged risk is recognised in the income
statement. This applies even if the hedged item is an available
for sale financial asset or is measured at amortised cost. If a
hedging relationship no longer meets the criteria for hedge
accounting, the cumulative adjustment made to the carrying
amount of the hedged item is amortised to the income
statement, based on a recalculated effective interest rate over
the residual period to maturity. In cases where the hedged item
has been derecognised, the cumulative adjustment is released to
the income statement immediately.
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 net investment income.
(V) 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. Certain 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.
However, for the majority of mortgage loans, the Group has
taken advantage of the 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 these mortgages
are estimated using discounted cash flow models, based on a
risk-adjusted discount rate which reflects the risks associated
with these products. 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, taking into
account the fair value of the underlying collateral. Subsequent
recoveries in excess of the loan’s written-down carrying value
are credited to the income statement.
(W) Collateral
The Group receives and pledges collateral in the form of cash or
non-cash assets in respect of stock lending transactions, 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 60). However, where
the Group has a currently enforceable legal right of set-off, the
collateral liability and associated derivative balances are shown
net, in line with market practice. Non-cash collateral received is
not recognised in the statement of financial position unless the
Group either (a) sells or repledges these assets in the absence of
default, at which point the obligation to return this collateral is
recognised as a liability; or (b) the counterparty to the
arrangement defaults, at which point the collateral is seized and
recognised as an asset.
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 recognised
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.
(X) Deferred acquisition costs and other assets
Costs relating to the acquisition of new business for insurance
and participating investment contracts are deferred in line with
existing local accounting practices, to the extent that they are
expected to be recovered 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 PRA’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.
Long-term business deferred acquisition costs are amortised
systematically over a period no longer than that in which they
are expected to be recoverable out of these future margins.
Deferrable acquisition costs for non-participating investment
and investment fund management contracts are amortised over
the period in which the service is provided. General insurance
and health deferred acquisition costs are amortised over the
period in which the related revenues are earned. The reinsurers’
share of deferred acquisition costs is amortised in the same
manner as the underlying asset.
Deferred acquisition costs are reviewed by category of
business at the end of each reporting period and are written-off
where they are no longer considered to be recoverable.
Other receivables and payables are initially recognised at
cost, being fair value. Subsequent to initial measurement they
are measured at amortised cost.
(Y) Statement of cash flows
Cash and cash equivalents
Cash and cash equivalents consist of cash at banks and in hand,
deposits held at call with banks, treasury bills and other short-
term highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an
insignificant risk of change in value. Such investments are those
with less than three months’ maturity from the date of
acquisition, or which are redeemable on demand with only an
insignificant change in their fair values.