Aviva 2014 Annual Report Download - page 125

Aviva plc Annual report and accounts 2014
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impact on the valuation of financial instruments, the difference
between the fair value at initial recognition and the transaction
price is not recognised immediately in the income statement,
but deferred and recognised in the income statement on an
appropriate basis over the life of the instrument but no later
than when the valuation is supported wholly by observable
market data or the transaction is closed out or otherwise
matured.
If an asset or a liability measured at fair value has a bid price
and an ask price, the price within the bid-ask spread that is
most representative of fair value in the circumstances is used to
measure fair value.
(G) Product classification
Insurance contracts are defined as those containing significant
insurance risk if, and only if, an insured event could cause an
insurer to make significant additional payments in any scenario,
excluding scenarios that lack commercial substance, at the
inception of the contract. Such contracts remain insurance
contracts until all rights and obligations are extinguished or
expire. Contracts can be reclassified as insurance contracts after
inception if insurance risk becomes significant. Any contracts
not considered to be insurance contracts under IFRS are
classified as investment contracts. Some insurance and
investment contracts contain a discretionary participation
feature, which is a contractual right to receive additional
benefits as a supplement to guaranteed benefits. These are
referred to as participating contracts.
As noted in accounting policy A above, insurance contracts
and participating investment contracts in general continue to be
measured and accounted for under existing accounting
practices at the later of the date of transition to IFRS or the date
of the acquisition of the entity, in accordance with IFRS 4.
Accounting for insurance contracts in UK companies is
determined in accordance with the Statement of Recommended
Practice issued by the Association of British Insurers, the most
recent version of which was issued in December 2005 and
amended in December 2006. In certain businesses, the
accounting policies or accounting estimates have been changed,
as permitted by IFRS 4 and IAS 8 respectively, to remeasure
designated insurance liabilities to reflect current market interest
rates and changes to regulatory capital requirements. When
accounting policies or accounting estimates have been changed,
and adjustments to the measurement basis have occurred, the
financial statements of that year will have disclosed the impacts
accordingly. One such example is our adoption of Financial
Reporting Standard 27 Life Assurance (FRS 27) which was issued
by the UK’s Accounting Standards Board (ASB) in December
2004. Aviva, along with other major insurance companies and
the ABI, signed a Memorandum of Understanding with the ASB,
under which we voluntarily agreed to adopt in full the standard
from 2005 in the Group’s IFRS financial statements. FRS 27 adds
to the requirements of IFRS but does not vary them in any way.
The additional requirements of FRS 27 are detailed in
accounting policy L below and in note 57.
(H) Premiums earned
Premiums on long-term insurance contracts and participating
investment contracts are recognised as income when receivable,
except for investment-linked premiums which are accounted for
when the corresponding liabilities are recognised. For single
premium business, this is the date from which the policy is
effective. For regular premium contracts, receivables are
recognised at the date when payments are due. Premiums are
shown before deduction of commission and before any sales-
based taxes or duties. Where policies lapse due to non-receipt
of premiums, then all the related premium income accrued but
not received from the date they are deemed to have lapsed is
offset against premiums.
General insurance and health premiums written reflect business
incepted during the year, and exclude any sales-based taxes or
duties. Unearned premiums are those proportions of the
premiums written in a year that relate to periods of risk after the
statement of financial position date. Unearned premiums are
calculated on either a daily or monthly pro rata basis. Premiums
collected by intermediaries, but not yet received, are assessed
based on estimates from underwriting or past experience, and
are included in premiums written.
Deposits collected under investment contracts without a
discretionary participation feature (non-participating contracts)
are not accounted for through the income statement, except for
the fee income (covered in accounting policy I) and the
investment income attributable to those contracts, but are
accounted for directly through the statement of financial
position as an adjustment to the investment contract liability.
(I) Other investment contract fee revenue
Investment contract policyholders are charged fees for policy
administration, investment management, surrenders or other
contract services. The fees may be for fixed amounts or vary
with the amounts being managed, and will generally be
charged as an adjustment to the policyholder’s balance. The
fees are recognised as revenue in the period in which they are
collected unless they relate to services to be provided in future
periods, in which case they are deferred and recognised as the
service is provided.
Initiation and other ‘front-end’ fees (fees that are assessed
against the policyholder balance as consideration for origination
of the contract) are charged on some non-participating
investment and investment fund management contracts. Where
the investment contract is recorded at amortised cost, these fees
are deferred and recognised over the expected term of the
policy by an adjustment to the effective yield. Where the
investment contract is measured at fair value, the front-end fees
that relate to the provision of investment management services
are deferred and recognised as the services are provided.
(J) Other fee and commission income
Other fee and commission income consists primarily of fund
management fees, distribution fees from mutual funds,
commissions on reinsurance ceded, commission revenue from
the sale of mutual fund shares and transfer agent fees for
shareholder record keeping. Reinsurance commissions receivable
are deferred in the same way as acquisition costs, as described
in accounting policy X. All other fee and commission income is
recognised as the services are provided.
(K) Net investment income
Investment income consists of dividends, interest and rents
receivable for the year, movements in amortised cost on debt
securities, realised gains and losses, and unrealised gains and
losses on fair value through profit or loss investments (as
defined in accounting policy T). Dividends on equity securities
are recorded as revenue on the ex-dividend date. Interest
income is recognised as it accrues, taking into account the
effective yield on the investment. It includes the interest rate
differential on forward foreign exchange contracts. Rental
income is recognised on an accruals basis, and is recognised on
a straight line basis unless there is compelling evidence that
benefits do not accrue evenly over the period of the lease.
A gain or loss on a financial investment is only realised on
disposal or transfer, and is the difference between the proceeds
received, net of transaction costs, and its original cost or
amortised cost, as appropriate.
Unrealised gains and losses, arising on investments which
have not been derecognised as a result of disposal or transfer,
represent the difference between the carrying value at the year
end and the carrying value at the previous year end or purchase
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IFRS Financial statements