Aviva 2013 Annual Report Download - page 185

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
183
Notes to the consolidated financial statements continued
35 – Direct capital instruments and fixed rate tier 1 notes
Notional amount
2013
£m
2012
£m
Issued November 2004
5.9021% £500 million direct capital instrument 500 500
4.7291% €700 million direct capital instrument 490 490
990 990
Issued May 2012
8.25% US $650 million fixed rate tier 1 notes 392 392
1,382 1,382
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004 and qualify as Innovative Tier 1
capital, as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. They have no fixed redemption date but the Company may,
at its sole option, redeem all (but not part) of the euro and sterling DCIs at their principal amounts on 28 November 2014 and
27 July 2020 respectively, at which dates the interest rates change to variable rates, or on any respective coupon payment date
thereafter. In the case of the sterling DCI this variable rate will be the six month sterling deposit rate plus margin while the euro
DCI variable rate will be the three month euro deposit rate plus margin.
The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012 and also qualify as Innovative Tier 1 capital. The FxdRNs are
perpetual but are subject to a mandatory exchange into non-cumulative preference shares in the Company after 99 years. The
Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on
any respective coupon payment date thereafter.
On the occurrence of a Capital Disqualification Event as defined in the terms and conditions of the issue for both the DCIs and
FxdRNs, the Company may at its sole option substitute at any time not less than all of the DCIs or FxdRNs for, or vary the terms of
the DCIs so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities.
In addition, on the occurrence of a Substitution Event as defined in the terms and conditions of the issue for the DCIs, the
Company may at its sole option substitute not less than all of the DCIs for fully paid non-cumulative preference shares in the
Company. These preference shares can only be redeemed on 28 November 2014 in the case of the euro DCIs and on 27 July 2020
in the case of the sterling DCIs, or in each case on any dividend payment date thereafter. For the FxdRNs, having given the required
notice, the Company has the right to substitute not less than all of the notes for fully paid non-cumulative preference shares at any
time. These preference shares can only be redeemed on 3 November 2017, or on any dividend payment date thereafter. The
Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be
non-cumulative.
The Company has the option to defer coupon payments on the DCIs or FxdRNs on any relevant payment date.
In relation to the DCIs, deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole
option of the Company:
 Redemption; or
 Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or
 Substitution by preference shares.
In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is
required to satisfy deferred coupons on the FxdRNs only in the following circumstances:
 Redemption; or
 Substitution by preference shares.
No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the
Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons.
In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital.
These instruments have been treated as equity. Please refer to accounting policy AE.
36 – Merger reserve
This note describes the use of the merger reserve.
Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’
(or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative
accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated
statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for
the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account.
The merger reserve is also used where more than 90% of the shares in a subsidiary are acquired and the consideration includes
the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 1985 and, from 1 October
2009, the Companies Act 2006.
The balance on the reserve of £3,271 million (2012: £3,271 million) has arisen through the mergers of Commercial Union,
General Accident and Norwich Union companies, forming Aviva plc in 2000, together with the acquisition of RAC plc (“RAC”) in
2005. Because RAC ownership was immediately transferred from Aviva plc to a subsidiary company, this reserve is unaffected by
the disposal of RAC in 2011.