Aviva 2013 Annual Report Download - page 233

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
231
Notes to the consolidated financial statements continued
59 – Derivative financial instruments and hedging
This note gives details of the various instruments we use to mitigate risk.
The Group uses a variety of derivative financial instruments, including both exchange traded and over-the-counter instruments,
in line with our overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or
interest rate risk on existing assets or liabilities, as well as planned or anticipated investment purchases.
In the narrative and tables below, figures are given for both the notional amounts and fair values of these instruments. The
notional amounts reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall
scale of the derivative transaction. They do not reflect current market values of the open positions. The fair values represent the
gross carrying values at the year end for each class of derivative contract held (or issued) by the Group.
The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and
documented under ISDA (International Swaps and Derivatives Association, Inc.) master agreements or their equivalent. Such
agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition,
the Group has collateral agreements in place between the individual Group entities and relevant counterparties.
(a) Instruments qualifying for hedge accounting
The Group has formally assessed and documented the effectiveness of its instruments qualifying for hedge accounting in
accordance with IAS 39, Financial Instruments: Recognition and Measurement. These instruments are analysed into cash flow, fair
value and net investment hedges, as detailed below.
(i) Cash flow hedges
At the end of 2012 the Group entered into two cash flow hedges, using foreign exchange forward and option contracts, to hedge
the currency exposure on expected proceeds in 2013 of businesses which were held for sale as of 31 December 2012 and sold in
2013. The fair value of the cash flow hedges as of 31 December 2012 was a £5 million derivative asset and no amounts in respect
of the cash flow hedges were recognised in the income statement. All cash flows being hedged have ceased as of the disposal
dates of the Aseval (Spanish long-term business) and the US Life businesses in 2013 and therefore no derivative asset or liability
exists as of 31 December 2013. Following the disposal of these entities in 2013, £(4) million (2012: £nil) has been recycled to the
income statement.
(ii) Fair value hedges
The Group entered into a number of interest rate swaps in order to hedge fluctuations in the fair value part of its portfolio of
mortgage loans and debt securities in the US. Subsequent to the sale of the US Life business, Aviva exited these swaps.
Therefore at 31 December 2013 there was a £nil notional value of these swaps (2012: £765 million) and £nil fair value
(2012: £54 million liability).
(iii) Net investment hedges
To reduce its exposure to foreign currency risk, the Group has entered into the following net investment hedges:
The Group has designated a portion of its euro denominated debt as a hedge of the net investment in its European
subsidiaries. Prior to the sale of the US business the Group also held a portion of its US dollar denominated debt as a hedge of the
net investment in the US Subsidiaries. The carrying value of the debt at 31 December 2013 was £1,428 million (2012: £1,741
million) and its fair value at that date was £1,516 million (2012: £1,785 million).
The foreign exchange loss of £40 million (2012: gain of £74 million) on translation of the debt to sterling at the statement of
financial position date has been recognised in the hedging instruments reserve in shareholders’ equity. This hedge was fully
effective throughout the current and prior years.
(b) Derivatives not qualifying for hedge accounting
Certain derivatives either do not qualify for hedge accounting under IAS 39 or the option to hedge account has not been taken.
These are referred to below as non-hedge derivatives.