5th Jul 2005 07:01
Aviva PLC05 July 2005 News Release Aviva plc 5 July 2005 Aviva releases its full year 2004 results restated in accordance with International Financial Reporting Standards ("IFRS") Following the successful completion of its conversion programme, Aviva plc ("Aviva") presents its 2004 results restatedin accordance with IFRS. This is in advance of its half year results which will be announced on 11 August 2005. Theimpact of IFRS reduces statutory operating profit before tax by 5% to £1,766 million, increases statutory profit beforetax by 10% to £1,642 million and statutory shareholders' funds reduce by 3% to £8,083 million. Aviva is also making a discretionary change to the calculation of its longer term investment return (LTIR) for the investments backing its general insurance and health businesses. These are also included in this restatement. As previously reported, Aviva continues to believe that: • IFRS phase 1 represents a technical accounting change to the way Aviva reports and presents its consolidated Modified Statutory Solvency Basis ("MSSB") results; there is no underlying change to the economics of Aviva's business. • IFRS will not impact Aviva's dividend policy. • IFRS in itself will have no significant impact on Aviva's solvency calculations which are subject to separate regulation. • The directors consider that embedded value continues to be the best measure of added value for long term insurance business, which is unaffected by IFRS. Aviva will change its LTIR methodology from 2005. As announced at the time of the 2004 results Aviva will align the equity and property rates used in the LTIR calculation with those used under European Embedded Value (EEV) principles.Aviva has also decided to change the LTIR calculation for fixed interest securities to include additionally the amortisation of premium or discount arising on purchase so as to show an LTIR which is equivalent to thegross redemption yield. We believe that these changes achieve greater consistency across Aviva's reporting. Furthermorethe change to the the LTIR basis for fixed interest securities more closely aligns reporting to the way we price generalinsurance and health business. There is no impact on profit before tax or shareholders' funds as a result ofthis change, as the actual investment returns on all assets held by the Group's general insurance and health businessesare included in these amounts. Aviva has decided to apply this discretionary change to the LTIR methodology in arrivingat the Group's restated 2004 operating profit before tax. The key changes for the year ended 31 December 2004 are: Restated for IFRS and Restated discretionary IFRS for IFRS Discretionary changes to UK GAAP changes changes changes to LTIR LTIR £m £m £m £m £m Statutory basis: Operating profit before tax 1,861 (95) 1,766 (97) 1,669Operating profit after tax and minorities 1,291 (7) 1,284 (68) 1,216Profit before tax 1,488 154 1,642 - 1,642Profit for the year 1,133 238 1,371 - 1,371Statutory shareholders' funds 8,320 (237) 8,083 - 8,083Dividend cover 2.25 times 2.23 times 2.11 times -------------------------------------------------------------------------------------------------------------------- Segmental results The Group will present its results under four key business segments: Long term business, general insurance and health business, fund management and all other non-insurance businesses. The impact of IFRS on the 2004 results on the keysegments is discussed further below. Restated for IFRS and Restated discretionary IFRS for IFRS Discretionary changes to UK GAAP changes changes changes to LTIR LTIR £m £m £m £m £mOperating profit Long-term business 1,185 (69) 1,116 - 1,116Fund management 43 (3) 40 - 40General insurance and health businesses 1,384 (28) 1,356 (97) 1,259Non-insurance operations (108) (13) (121) - (121)Corporate costs (178) (10) (188) - (188)Unallocated interest charges (465) - (465) - (465)Centre unallocated income - 28 28 - 28--------------------------------------------------------------------------------------------------------------------Operating profit before tax attributable to shareholders' profits 1,861 (95) 1,766 (97) 1,669-------------------------------------------------------------------------------------------------------------------- Shareholders' funds 8,320 (237) 8,083 - 8,083 Long-term business The 2004 results for Aviva's life businesses on an EEV basis remain unchanged and the directors consider that embeddedvalue continues to be the best measure of added value for long term insurance business. This means that the Group'sreported life new business contribution, margin and internal rate of return remain unchanged following the introductionof IFRS. On an IFRS basis statutory life operating profit before shareholders' tax falls by £69 million from £1,185 million to £1,116 million. The principal reasons for this change are as follows: • The adoption of IAS 39 for non-participating investment contracts and other related changes reduce operating profit by £77 million in total;• A change in approach for allocating tax between policyholders and shareholders, reduces operating profit before shareholders' tax by £93 million. This presentational change has no impact on the tax charged to the policyholder life funds nor on operating profit after tax or dividend cover;• Increased pension costs of £27 million arise as a result of applying IAS 19 Employee benefits; • Changes to the valuation of investments increases profit by £44 million while changes to investment accounting result in £67 million of returns being incorporated within operating profit;• Other sundry differences increasing operating profit by £17 million. These changes are explained further within Appendix A to this announcement on pages 6 to 8. -------------------------------------------------------------------------------------------------------------------- General insurance and health business Operating profit before tax falls by £28 million from £1,384 million under UK GAAP to £1,356 million under IFRS. Thisreduction is principally due to increased pension costs under IAS 19 Employee Benefits. As outlined above, in addition to the required IFRS changes, Aviva has, at its discretion, chosen to review the methodology previously adopted for recording longer term investment return for general insurance and health business. As noted with our preliminary 2004 results, with effect from 2005, Aviva has chosen to apply the same long term rates of investment return in respect of economic assumptions for equities and property as those used to arrive at life operating returns under EEV principles. Applying this change to the 2004 results for general insurance and health business reduces the longer term investment returns on equities and property by £25 million. In addition we have reviewed the longer term investment return methodology in respect of fixed income securities. Under UK GAAP the amount included within operating profit reflected the actual income received with realised andunrealised gains or losses being included within short term fluctuations. At its discretion, Aviva has now chosen to include within the operating profit the amortisation of the premium/discount arising upon the acquisition of suchsecurities to arrive at an investment return which is equivalent to the gross redemption yields of fixed income securities. The effect of applying this change to 2004 is to reduce operating profit before tax by £72 million. Shareholders' funds Upon conversion to IFRS, Group's shareholders' funds fall by £237 million to £8,083 million. The principal reasons forthis reduction are as follows:• Removal of the claims equalisation reserve net of deferred tax increases shareholders' funds by £271 million;• Changes in the timing of dividend recognition increases shareholders' funds by £364 million; • Investment valuation changes increase shareholders' funds by £284 million before tax;• Removal of the pension prepayment valued in accordance with SSAP 24 Accounting for Pension Costs (UK GAAP) and recognition of the pension deficit valued under IAS 19 Employee Benefits, decreases shareholders' funds by £909 million, net of deferred tax. Aviva has apportioned substantially all the pension deficit to shareholders.• The prohibition from discounting deferred tax balances decreases shareholders' funds by £215 million. Appendices The following appendices are attached to this announcement:• Appendix A: Summarised consolidated operating profit statement, statement of recognised income and expense and summarised consolidated statement of changes in equity, for the year ended 31 December 2004 restated on an IFRS basis, including the discretionary change to LTIR, with a reconciliation to the Group's results published under UK GAAP (MSSB). • Appendix B: Restated summarised consolidated balance sheet on an IFRS basis at 31 December 2004, with a reconciliation to the balance sheet published under UK GAAP (MSSB). • Appendix C: Restated summarised consolidated balance sheet on an IFRS basis at 1 January 2004, with a reconciliation to the balance sheet published under UK GAAP (MSSB). • Appendix D: Summarised consolidated profit and loss account on an EEV basis for the year ended 31 December 2004, restated to incorporate the results of non-long term business on an IFRS basis, including the discretionary change to LTIR, together with summarised consolidated balance sheet on an EEV basis for the year ended 31 December 2004. -------------------------------------------------------------------------------------------------------------------- Enquiries: Analysts/Investors:Andrew Moss, group finance director +44 (0)20 7662 2679Nic Nicandrou, group financial control director +44 (0)20 7662 2118Siobhan Boylan, director of group financial reporting +44 (0)20 7662 2176 Media:Sue Winston, head of group media relations +44 (0)20 7662 8221Dominick Peasley, Financial Dynamics +44 (0) 20 7269 7243 NEWSWIRES: There will be a conference call today for newswires at 07:45am (BST) hosted by Andrew Moss, group finance director, and Nic Nicandrou, group financial control director on +44 (0)20 7365 1842. ANALYSTS: There will be a conference call today for analysts at 09:30am (BST) on +44 (0)20 7784 1015. The conference call will be hosted by Andrew Moss, group finance director and Nic Nicandrou, group financial control director. Replaywill be available for 2 weeks until 18 July 2005. The dial-in number for replay is +44 (0)20 7784 1024 and the passcode is 2860643# for the presentation and questions and answers and 5233848# for questions and answers only. Notes to editors: • Aviva is the world's fifth-largest insurance group based on gross worldwide premiums and one of the leading providers of life and pensions to Europe with substantial positions in other markets around the world. • Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide premium income and retail investment sales from continuing operations of £33 billion for the year ended 31 December 2004 and assets under management of £272 billion at 31 December 2004. • The Aviva media centre at www.aviva.com/media includes images, company and product information and a news release archive. • The key accounting policy changes under IFRS can be summarised as follows: a) All policies currently classified as insurance under UK GAAP must be classified into investment or insurance contracts. Those contracts meeting the definition of insurance or those investment contracts with a discretionary participating feature will continue to be accounted for under UK GAAP, except that FRS 27 Life Assurance has been applied to the UK with-profits liabilities and an active valuation basis has been adopted for certain technical liabilities to reflect the fact that substantially all assets will be held at fair value. All other investment contracts must be accounted for under IAS 39 which, amongst other things, has the effect of reducing the level of costs that can be deferred.b) Claims equalisation provisions can no longer be held. c) The balance sheet now incorporates the pension deficit as recorded under International Accounting Standard 19, Employee Benefits (IAS 19).d) Substantially all investments (excluding certain originated mortgages and loans) will be held at fair value, including those currently held at amortised cost.e) All future business combinations will be treated as acquisitions and intangibles acquired, such as brands, customer lists and distribution agreements explicitly valued. Goodwill will no longer be amortised but will subject to annual impairment review. • This announcement may contain "forward-looking statements" with respect to certain of Aviva's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Aviva and its affiliates operate. As a result, Aviva's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva's forward-looking statements. • Aviva undertakes no obligation to update the forward-looking statements contained in this announcement or any other forward-looking statements we may make. --------------------------------------------------------------------------------------------------------------------Page 1 Basis of preparation of restated financial information contained in the appendices From 2005, all European Union listed companies are required to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board (IASB). The attached appendices contain certain financial information presented as part of the Group's results in 2004 restated for the implementation of InternationalFinancial Reporting Standards (IFRS) and will form part of the comparatives for 2005 reporting purposes. The attached appendices have been prepared using the Group's accounting policies under IFRS substantially all of which were set out on pages 121 to 126 in the 2004 Report & Accounts. The significant changes to these policies following external and industry developments are set out in appendix C of this announcement. The Group's revised accounting policies are in accordance with IFRS issued by the IASB. The European Union has endorsed all relevant IFRS with the exception of the Amendment to IAS19 Employee Benefits (2004) and the amendments to IAS39, The Fair Value Option published by the IASB in June 2005. Both these amendments are expected to be endorsed by the European Commission during 2005 and although they are not mandatory until 2006, the Group has decided to adopt them early and reflect their impact within the 2004 restatedfinancial information. The Group's full year financial statements at 31 December 2005 will be prepared in accordancewith these endorsed IFRS and this announcement reflects the accounting policies expected to apply at the year end. IFRS remains subject to possible amendment by interpretative guidance from the IASB or other external bodies and therefore are subject to change prior to publication of the Group's full IFRS financial statements early in 2006. In line with the requirements of International Financial Reporting Standard 1, First-Time Adoption of International Financial Reporting Standards (IFRS1), Aviva has applied the Group's accounting policies under IFRS retrospectively at the date of transition being 1 January 2004, with exception of a number of permitted exemptions as detailed below: Business combinations The Group has elected not to apply retrospectively the provisions of International Financial Reporting Standard 3, Business Combinations, to business combinations that occurred prior to 1 January 2004. At the date of transition noadjustment was made between UK GAAP and IFRS shareholders' funds for any historical business combination. Cumulative translation differences The Group has elected that the cumulative translation differences of foreign operations were deemed to be zero at the transition date to IFRS. Equity compensation plans The Group has elected not to apply the provisions of International Financial Reporting Standard 2, Share-based Payment,to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005. Employee benefits All cumulative actuarial gains and losses on the Group's defined benefit pension schemes have been recognised in equity at the transition date. Comparatives The Group has not taken advantage of the exemption within IFRS1 that allows comparative information presented in the first year of adoption of IFRS not to comply with International Accounting Standard 32, Financial Instruments:Disclosure and Presentation (IAS32), International Accounting Standard 39, Financial Instruments: Recognition and measurement (IAS39) and International Financial Reporting Standard 4, Insurance Contracts (IFRS4). Estimates Where estimates had previously been made under UK GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made for the same date on transition to IFRS (i.e., judgements affecting the Group's opening balance sheet have not been revisited for the benefit of hindsight). --------------------------------------------------------------------------------------------------------------------Page 2 Held for sale The requirements of International Financial Reporting Standard 5, Non-current Assets Held for Sale and Discontinued Operations have been applied prospectively from 1 January 2005. FRS27 Financial Reporting Standard 27, Life Assurance (FRS27) was issued by the UK's Accounting Standards Board (ASB) on 13 December 2004, following the Penrose inquiry. Aviva, along with other major insurance companies and the Associationof British Insurers (ABI), has signed a Memorandum of Understanding (MoU) with the ASB relating to FRS27. Under this MoU, Aviva has agreed to adopt voluntarily in full the standard from 2005 within the Group's IFRS financial statements. Within FRS27, the ASB acknowledged the difficulty of applying the requirements retrospectively and indeed it is the Group's view that it would be impractical to do so. Hence, in accordance with IAS8, only the balance sheet at 31 December 2004 has been restated for the impact of FRS27. No adjustments have been made, nor any required, to the 2004 income statement and the opening balance sheet at 1 January 2004. Auditors' review The restated results for the year ended 31 December 2004 have been audited by the auditor, Ernst & Young LLP. The summary IFRS information included in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985 and does not include details of the Group's consolidated cash flows. --------------------------------------------------------------------------------------------------------------------Page 3 Appendix A: Summarised consolidated pro forma profit and loss statement for the year ended 31 December 2004 Restated for Restated IFRS and UK IFRS for IFRS LTIR* LTIR* GAAP changes changes (Note 6) changes £m £m £m £m £m Net premiums written (excluding associates) Life premiums 19,899 (6,357)** 13,542 - 13,542General insurance and health 9,809 - 9,809 - 9,809 ---------------------------------------------------- 29,708 (6,357) 23,351 - 23,351 ----------------------------------------------------Operating profit Long term business 1,185 (69) 1,116 - 1,116Fund management 43 (3) 40 - 40General insurance and health business 1,384 (28) 1,356 (97) 1,259Non-insurance operations (108) (13) (121) - (121)Corporate costs (178) (10) (188) - (188)Unallocated interest charges (465) - (465) - (465)Unallocated income - 28 28 - 28-------------------------------------------------------------------------------------------------------------------Operating profit before tax attributable to shareholders' profits from continuing operations 1,861 (95) 1,766 (97) 1,669 Amortisation/impairment of goodwill (120) 79 (41) - (41)Amortisation of acquired additional value of in-force long-term business and other intangibles (126) 34 (92) - (92)Financial Services Compensation Scheme and other levies (49) - (49) - (49)Short-term fluctuation in return on investments 131 (67) 64 97 161Change in the equalisation provision (23) 23 - - -Net loss on the disposal of subsidiary and associated undertakings (136) 170 34 - 34Exceptional costs for termination of operations (50) 10 (40) - (40)--------------------------------------------------------------------------------------------------------------------Profit before tax attributable to shareholders'profits 1,488 154 1,642 - 1,642Tax attributable to shareholders'profits (355) 84 (271) - (271)--------------------------------------------------------------------------------------------------------------------Profit for the year 1,133 238 1,371 - 1,371--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Attributable to: -------------------------------------------------------------------------------------------------------------------Equity shareholders of Aviva plc 1,057 218 1,275 - 1,275-------------------------------------------------------------------------------------------------------------------Minority interests 76 20 96 - 96------------------------------------------------------------------------------------------------------------------- Earnings per share based on operating profit after tax attributable to ordinary shareholders 57.2p 56.9p 53.9p Earnings per share based on profit after tax attributable to ordinary shareholders 45.8p 55.5p 55.5p Dividend cover*** 2.25 times 2.23 times 2.11 times * The Group has decided to adopt from 2005, as a discretionary change that is not required by IFRS, a change in rates and methodology in the calculation of LTIR as it applies to its general insurance and health business.** Represents the application of deposit accounting for those contracts classified as non-participating investment contracts.*** Calculated as operating profit net of tax, minorities and preference dividend over interim and final ordinary dividends declared in respect of the financial year --------------------------------------------------------------------------------------------------------------------Page 4 Analysis of IFRS adjustments to the pro forma profit and loss statement for the year ended 31 December 2004 as a resultof the transition to IFRS Investment Insurance Employee Policyholder valuation changes benefits Goodwill tax Other Total (Note 1) (Note 2) (Note 3) (Note 4) (Note 5) items adjustments £m £m £m £m £m £m £m Operating profit Long term business 111 (77) (27) (93) 17 (69)Fund management (3) (3)General insurance and health business 5 (33) (28)Non-insurance operations (3) (10) (13)Corporate costs (10) (10)Unallocated interest charges -Unallocated income 28 28------------------------------------------------------------------------------------------------------------------Operating profit before tax attributable to shareholders 111 (72) (48) - (93) 7 (95)Amortisation/impairment of goodwill 79 79Amortisation of AVIF and other intangibles 37 (3) 34Financial Services Compensation Scheme and other levies -Short-term investment fluctuation (67) (67)Change in equalisation provision 23 23Net loss of the disposal of subsidiary and associated undertakings 169 1 170Exceptional costs for termination of operations 10 10------------------------------------------------------------------------------------------------------------------Profit before tax attributable to shareholders profits 44 (49) (48) 248 (56) 15 154Tax attributable to shareholders' profits - (7) 15 - 56 20 84------------------------------------------------------------------------------------------------------------------Profit for the year 44 (56) (33) 248 - 35 238------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------Page 5 Summarised consolidated statement of recognised income and expense For the year ended 31 December 2004 IFRS 2004 £m Fair value gains, net of transfers to the profit and loss account 161Actuarial gains and losses on pension schemes (145)Foreign exchange rate movements 57Aggregate tax effect - shareholder tax (15)--------------------------------------------------------------------------------------------------------------------Net income recognised directly in equity 58Profit for the year 1,371-------------------------------------------------------------------------------------------------------------------Total recognised income and expense for the year 1,429------------------------------------------------------------------------------------------------------------------- Summarised consolidated statement of changes in equity For the year ended 31 December 2004 IFRS 2004 £m Total equity at 31 December 2003 7,024Total recognised income and expense for the year 1,429Dividend and appropriations for the year (570)Movement in shares held by employee trusts 1Increase in share capital 25Issue of Direct Capital Instrument 990Issue costs of Direct Capital Instrument (9)Shares issued in lieu of dividends 103-------------------------------------------------------------------------------------------------------------------Total equity 8,993Minority interests (910)-------------------------------------------------------------------------------------------------------------------Equity attributable to shareholders 8,083------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------Page 6 Notes to the Analysis of adjustments to the pro forma profit and loss statement for the year ended 31 December 2004as a result of the transition to IFRS Note 1: Investment valuation The main investment valuation change upon conversion to IFRS is that assets,which are not classified as being held to maturity, are required to be held at fair value. Under UK GAAP certain of the Group's bonds were held at amortised cost. This change in valuation of debt securities resulted in a £2,459 million increase in the valuation of securities at 31 December 2004. Most of this change was offset by corresponding movements in the unallocated divisible surplus andtechnical liabilities. However, there was a residual uplift which resulted in a positive increase in the Group's shareholders' funds and the year on year movement in respect of those investments classified as "at fair value throughprofit and loss account" is reported as increased profits in the 2004 income statement. In addition changes to investment accounting has resulted in £67 million of investment gains being reclassified from short term fluctuations to the life operating profit. Note 2: Insurance changes Insurance changes consist of: • The removal of the claims equalisation provision, improving profit before tax by £23 million but with no impact on operating profit;• The revaluation of liabilities and deferred acquisition costs on those contracts classified as non-participating investment contracts reducing operating profit by £91 million;• The revaluation of certain life reinsurance treaties, increasing operating profit by £14 million; • Other sundry changes to our general insurance business reserves increasing operating profit in 2004 by £5 million. Of these changes the most significant impact occurs on our UK Life business where profit falls by £90 million as a result of the adoption of IAS 39. On the basis of 2004 gross written premiums, 44% of our total life business within the UK is classified as non-participating investment contracts and includes unit linked bonds and unit-linked pension contracts IAS 39 reduces the level of deferred acquisition costs that can be recognised as well as requiring the removal from technical provisions of positive or negative non-unit reserves determined on the local valuation basis held over and above the unit fund value. The effect of these changes is that the profits on a non-participating investment contract will arise later in the contract term under IFRS than under UK GAAP. The overall impact on annual profits arising from this accounting change is dependent upon levels of new business, product mixes, the ageing profile of the existing in-force business and reserving policies. Additional new businessstrain under IFRS would be expected to be mitigated by the emergence of higher IFRS basis profits of the in-force book of business. Until mid 2003, unit linked bond business sold by Norwich Union in the UK contained a guaranteed minimum death benefit and hence contained significant insurance risk, and, accordingly, as permitted by IFRS Phase 1 the UK GAAP basis profit profile has been retained. After mid 2003 this benefit was removed and business written since this time has been classified as non-participating investment business. The existing in-force business is therefore small and profits are insufficient to offset the new business strain. Therefore a significant conversion effect on profit arises. This reduction in profit is no more than a timing adjustment. Aviva's main value measure remains European embedded value and the profit arising on this basis is unaffected by this technical accounting change. Note 3: Employee benefits The overall impact of adopting IAS 19 Employee benefits and IFRS 2 Share based compensation has been to increase costs by £48 million in 2004. The increase in costs partly reflects the fact that IAS 19 has used a more current actuarialvaluation to measure the ongoing pension service cost. The charge under UK GAAP was based on the SSAP 24 valuation which, as disclosed in the 2004 Report & Accounts, was last updated for financial reporting purposes in April 2002. --------------------------------------------------------------------------------------------------------------------Page 7 Note 4: Goodwill Goodwill is no longer amortised under IFRS but is subject to annual impairment review. There were £41 million of impairment charges incurred in 2004 relating to sundry small overseas businesses, which had been fully reflected within the UK GAAP amortisation charge of £120 million. No additional impairment arose as a result of the transition to IFRS. A further £169 million credit arises to profit before tax, as goodwill previously charged directly to reserves was deducted from profit upon disposal of subsidiaries under UK GAAP. Under IFRS no such deduction is required. Thischange has no impact on operating profit or shareholders' funds. Note 5: Policyholder tax Operating profit before tax has fallen relative to MSSB by £93 million as a result of a change in the allocation of the tax charged to the life funds between policyholders and shareholders. This presentational change has no impact on operating profit after tax or the tax suffered by the life funds but merely represents how the tax charge is presented in the financial statements. The increase in tax costs charged to operating profit arises principally in the UK, but has been partly offset by a change in allocation in the Netherlands, where all tax is now deemed to be shareholder tax. It is a feature of the UK tax regime that the tax attributable to life business operations is a single charge in respect of policyholder income and shareholder profits. Under UK GAAP, the difficulty of allocating this charge betweenpolicyholders and shareholders is generally acknowledged and hence, under UK GAAP, the total tax charge is deducted from life operating profit in the long-term technical account, the net result of which is then grossed up at theeffective shareholder tax rate. Traditionally, Aviva has grossed up at 30% which represents its view of the long term effective rate. We remain of the view that this will be the rate suffered by shareholders over the longer term. Under IFRS, all taxation must be reported within the taxation line. The profit before this total tax would present a misleading picture of the group's profit as (i) much of the policyholder tax is in the with-profits funds where the Fund for Future Appropriations is adjusted on a net of tax basis; (ii) the cost of policyholder tax is priced into therelevant products and (iii) the level of tax will vary on an annual basis in line with the investment return on assetsbacking the long-term funds. Therefore the UK industry has agreed that it is appropriate to adopt an income statement presentation which depicts profit before tax attributable to the shareholders. This requires an allocation of the total tax charge between policyholders and shareholders, with the policyholder charge being offset against operating profit. There is no universal view on how this allocation should be performed. Aviva has taken the view that the IFRS conceptual framework does not permit companies to use notional allocation or gross-up methods. Instead, the allocation to policyholder tax should reflect the actual tax payable at policyholder rates, including deferred tax. Aviva has therefore developed a conceptual methodology to achieve this consistently year on year. In 2004 the level of tax attributed to the shareholders was reduced by the following arrangement. The £1.5 billion of capital injected into the life funds on the demutualisation of Norwich Union in 1997 had the effect that futuredistributions up to that amount by Norwich Union Life and Pensions are treated as already having suffered some shareholder tax. In 2004 a substantial proportion of the company's shareholders' surplus was sheltered by thisarrangement and this has the impact of lowering the actual tax paid at shareholder rates. This is a genuine benefit to shareholders and resulted in higher profit after tax. This tax benefit has a finite capacity and we anticipatethat it will be substantially exhausted by the end of 2005, such that over the long term there will be an increase in shareholder tax rates back towards 30%. The use of this capacity is dependent on the level of distributionsmade by Norwich Union Life & Pensions. The impact of this is that operating profit before tax falls relative to MSSB as the actual shareholder rate suffered in the UK in 2004 was lower than 30%. It should be noted that from an EEV perspective, an asset is already established representing this tax benefit and so30% remains as an appropriate shareholder tax rate for this business. --------------------------------------------------------------------------------------------------------------------Page 8 Note 6: Longer term investment return Aviva has chosen to revisit its longer term investment return ("LTIR") methodology from 2005 as part of a discretionary change not required by IFRS. In order to provide suitable trend analysis the Group has decided to present 2004 comparatives in accordance with this new methodology. The key changes are as follows: • As highlighted in the 2004 results announcement, for properties and equity, we will apply lower start of year long-term rates of investment return consistent with those adopted for reporting life operating returns under EEV principles. This would have reduced operating profit in 2004 by £25 million;• For fixed income securities we will include the amortisation of the premium or discount arising upon acquisition of a bond within our LTIR calculation. This has the effect of reducing operating profit before tax by £72 million in 2004;• The LTIR will only be applied to general insurance and health business. These changes have no effect on profit before tax. --------------------------------------------------------------------------------------------------------------------Page 9 Appendix B: Summarised consolidated balance sheet as at 31 December 2004 UK GAAP as published Adjustments IFRS £m £m £m Assets Intangible assets Goodwill 1,135 49 1,184 Acquired value of in-force business and other intangible assets 451 65 516------------------------------------------------------------------------------------------------------------------ 1,586 114 1,700Property and equipment 283 529 812Investment property 9,407 1,650 11,057Investments in joint ventures and associates 2,088 40 2,128Financial investments and loans 140,763 47,648 188,411Assets held to cover linked liabilities 51,144 (51,144) -Reinsurance assets 7,540 963 8,503Tax assets 63 845 908Other assets 16,275 (3,270) 13,005Cash and cash equivalents 3,121 9,658 12,779Total assets 232,270 7,033 239,303 Equity Share capital 1,760 - 1,760Capital reserves 3,878 - 3,878Revaluation and other reserves - 736 736Retained earnings 2,682 (973) 1,709Equity attributable to shareholders' of Aviva plc 8,320 (237) 8,083Minority interests 924 (14) 910Total Equity 9,244 (251) 8,993 Liabilities Insurance liabilities 195,591 (71,469) 124,122Liability for investment contracts - 69,555 69,555Unallocated divisible surplus 9,218 (1,669) 7,549Provisions 340 1,785 2,125Tax liabilities 1,617 848 2,465Borrowings (including subordinated debt) 4,560 5,530 10,090Other liabilities 11,700 457 12,157Net asset value attributable to unitholders - 2,247 2,247Total liabilities 223,026 7,284 230,310Total equity and liabilities 232,270 7,033 239,303 --------------------------------------------------------------------------------------------------------------------Page 10 Analysis of adjustments to the balance sheet at 31 December 2004 as a result of the transition to IFRS Investment Insurance Employee Dividend Deferred Borrowings valuation changes benefits Goodwill recognition taxation /Cash FRS 27 Other items (Note 1) (Note 2) (Note 3) (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) (Note 9) Total £m £m £m £m £m £m £m £m £m £mAssets Intangible assets: Goodwill 49 - 49Acquired value of in-force business and other intangible assets 65 - 65Property and equipment 529 529Investment property 1,650 1,650Investments in joint ventures and associates 8 15 17 40Financial investments and loans 2,599 (3,598) 48,647 47,648Assets held to cover linked liabilities (51,144) (51,144)Reinsurance assets (108) 417 654 963Tax assets 845 - 845Other assets (19) (475) (13) (2,763) (3,270)Cash and cash equivalents 8,792 866 9,658----------------------------------------------------------------------------------------------------------------------Total assets 2,607 (127) (475) 129 - 845 5,194 404 (1,544) 7,033---------------------------------------------------------------------------------------------------------------------- Equity Share capital - -Capital reserves - -Revaluation and other reserves 736 - 736Retained earnings (452) 166 (909) 129 364 (322) (26) - 77 (973)----------------------------------------------------------------------------------------------------------------------- Equity attributable to shareholders' of Aviva plc 284 166 (909) 129 364 (322) (26) 77 (237)Minority interests (14) (14)-----------------------------------------------------------------------------------------------------------------------Total Equity 284 166 (909) 129 364 (322) (26) 63 (251)-----------------------------------------------------------------------------------------------------------------------Liabilities Insurance liabilities 250 (242) (813) 28 4,226 (74,918) (71,469)Liability for investment contracts 69,555 69,555Unallocated divisible surplus 2,073 (165) (62) 17 (3,822) 290 (1,669)Pension obligations and other provisions 1,643 142 1,785Tax liabilities (396) 1,201 (4) 47 848Borrowings (inc.subordinated debt) 5,207 323 5,530Other liabilities 114 (364) 707 457Net asset value attributable to unitholders 2,247 2,247-----------------------------------------------------------------------------------------------------------------------Total liabilities 2,323 (293) 434 - (364) 1,167 5,220 404 (1,607) 7,284----------------------------------------------------------------------------------------------------------------------Total equityand liabilities 2,607 (127) (475) 129 - 845 5,194 404 (1,544) 7,033---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------Page 11 Notes to the analysis of adjustments to the balance sheet as at 31 December 2004 as a result of the transition to IFRS The UK GAAP balance sheet has been presented in a format consistent with IFRS. The only significant change in heading is that the Fund for Future Appropriations is now renamed the Unallocated Divisible Surplus. The basis for the material adjustments between UK GAAP and IFRS is as follows: Note 1: Investment valuation The adjustments in respect of investment valuation arise from the following: £mIncrease in valuation of debt securities 2,459Change in valuation of certain mortgages 119Other sundry adjustments 21-------------------------------------------------------------------------------------------------------------------- 2,599Related Shares:
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