Aviva 2013 Annual Report Download - page 166

Aviva plc
Annual report and accounts 2013
164
Notes to the consolidated financial statements continued
22 – Investment property
This note gives details of the properties we hold for long-term rental yields or capital appreciation.
2013
Restated1
2012
Freehold
£m
Leasehold
£m
Total
£m
Freehold
£m
Leasehold
£m
Total
£m
Carrying value
At 1 January 8,552 1,405 9,957 9,848 1,790 11,638
Impact of the adoption of IFRS 101 — — — (543) (350) (893)
Additions 332 10 342 536 194 730
Capitalised expenditure on existing properties 26 2 28 103 8 111
Fair value gains/(losses)1 111 73 184 (396) (79) (475)
Disposals2 (888) (248) (1,136) (940) (207) (1,147)
Transfers from property and equipment (note 21) 24 — 24 89 54 143
Foreign exchange rate movements 50 2 52 (145) (5) (150)
At 31 December 8,207 1,244 9,451 8,552 1,405 9,957
Less: Assets classified as held for sale — — — (18) — (18)
8,207 1,244 9,451 8,534 1,405 9,939
1 Comprises the impact of adoption of IFRS 10 and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting policy D see note 1 for further details.
2 Disposals include investment property sold as part of the disposal of the US Life business in 2013.
The majority of investment property in the UK is valued at least annually by external chartered surveyors in accordance with the
guidance issued by The Royal Institution of Chartered Surveyors or using internal valuations and estimates during the intervening
period. For other investment property, valuations are produced by local qualified staff of the Group or external qualified
professional valuers in the countries concerned. In the event of a material change in market conditions between the valuation
date and balance sheet date, adjustments are made to reflect any material changes in fair value. Values are calculated using a
discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, lease expiry,
or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the
property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties
where available.
The fair value of investment properties leased to third parties under operating leases at 31 December 2013 was £9,447 million
(2012: £10,822 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these
leases are given in note 54(b)(i).
23 – Fair value methodology
This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also
provides an analysis of these according to a ‘fair value hierarchy’, determined by the market observability of valuation inputs.
(a) Basis for determining fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the ‘fair
value hierarchy’ described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1
Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can
access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for
substantially the full term of the instrument. Level 2 inputs include the following:
 Quoted prices for similar assets and liabilities in active markets.
 Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price
quotations vary substantially either over time or among market makers, or in which little information is released publicly.
 Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves
observable at commonly quoted intervals, implied volatilities, and credit spreads).
 Market-corroborated inputs.
Where we use broker quotes and no information as to the observability of inputs is provided by the broker, the investments are
classified as follows:
 Where the broker price is validated by using internal models with market observable inputs and the values are similar, we
classify the investment as Level 2.
 In circumstances where internal models are not used to validate broker prices, or the observability of inputs used by brokers
is unavailable, the investment is classified as Level 3.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure
fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same,
i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability.
Therefore, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing
the asset or liability. Examples are investment properties, certain private equity investments and private placements.