1. Basis of preparation - IFRS basis
From 2005, all European Union listed companies were required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union. The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2007 and have been taken from the Group's Annual Report and Accounts which will be published on 26 March 2008.
The preliminary announcement for the year ended 31 December 2007 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on an IFRS basis for the full years 2007 and 2006 have been audited by Ernst & Young LLP. The auditors have reported on the 2006 and 2007 accounts and their reports were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's 2006 Report and Accounts have been filed with the Registrar of Companies.
Change to definition of operating profit
The adoption of IFRS accounting policies in 2005 led to increased volatility in the results of the Group's long-term savings businesses, due primarily to investment market performance and fiscal policy changes. IFRS operating profit is one of the key indicators of performance for the Group and we have therefore changed its definition to disclose the results reflecting longer-term investment performance and reflect certain other changes described below:
The key changes to our definition of IFRS operating profit are:
- Operating profit is now based on the investment returns that the Group expects to make on the financial investments that back the shareholder and policyholder funds of its long-term business over the reporting period, rather than the actual returns on these investments. The difference between the expected return and the actual return on investments, and the corresponding impact on liabilities, is shown below the operating profit line.
- The amortisation of acquired value of in-force business (AVIF) on both insurance and investment contracts is now included within operating profit. This change matches the emergence of benefit from the acquired book with the associated amortisation expense.
- The criteria for treating an item as exceptional, outside operating profit, have been refined to limit these to significant items only. Accordingly, the 2006 Financial Services Compensation Scheme levy is now included in operating profit.
- The result for Norwich Union Life Services has been reclassified as long-term business instead of other operations, to match its treatment under EEV.
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Restatement of prior year figures
i) Gross up for cash collateral received
During 2007 we identified that certain cash collateral transactions should have been historically recognised on the balance sheet, with a corresponding obligation to return this collateral, instead of showing a net nil position. As a result, the figures for loan assets and payables and other financial liabilities as at 31 December 2006 have been restated by increasing them both by £2,129 million. In addition, we identified that the interest paid on cash collateral received and the interest earned from on-lending this cash had previously been offset and reported as net interest income. The 2006 comparative figures have therefore been restated in order to report this interest expense and interest income separately, by increasing both by £17 million.
Neither of these adjustments has any impact on profit for the year, operating profit or earnings per share in 2006, nor retained earnings, net assets or total equity at 31 December 2006.
ii) Restatement of cash equivalents
During the year, we have reviewed the policy for cash and cash equivalents and have determined that certain investments, previously classified as cash equivalents, would be more appropriately classified as financial investments.
The application of this review to prior year balances has led to a reduction of the cash equivalents balance at 31 December 2006 by £1,425 million, with a corresponding increase in the debt securities total of the same amount. This restatement has no impact on net assets or total equity. The effect on the opening balances in the prior year is to reduce cash equivalents and increase debt securities by £1,444 million. The effect on the cash flow statement is therefore to reduce the prior year cash flows from operating activities by £19 million.
Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the "functional currency"). The consolidated financial statements are stated in sterling, which is the Company's functional and presentation currency. Unless otherwise noted, the amounts shown in the financial statements are in millions of pounds sterling (£m). As supplementary information, consolidated financial information is also presented in euros.
- The results for the year to 31 December 2007 are presented on a regional basis: United Kingdom, Europe, North America and Asia Pacific.
- The UK region includes the UK life and general insurance businesses, all of the business of Morley as well as the results of Aviva Re, the Group's captive reinsurance business;
- Europe incorporates all European operations excluding the UK as set out above;
- North America is made up of our life business in the United States and general insurance and fund management businesses in Canada; and
- Asia Pacific includes all our Asian and Australian businesses.
The Group enters into stock lending transactions and received cash or non-cash collateral to reduce the Group's exposure to counterparty credit risk. Collateral received in the form of cash is then lent out at market rates of interest. During 2007, we identified that certain cash collateral transactions should have been historically recognised on the balance sheet, with a corresponding obligation to return this collateral, instead of showing a net nil position.
As a result, the figures for loan assets and payables and other financial liabilities as at 31 December 2006 have been restated by increasing them both by £2,129 million. The equivalent adjustment at 1 January 2006, the start of the comparative period, would have been to increase both loan assets and payables and other financial liabilities by £120 million.
In addition we identified that the interest paid on cash collateral received and the interest earned from on-lending this cash had previously been offset and reported as net interest income. The 2006 comparative figures have therefore been restated in order to report this interest expense and interest income separately, by increasing both by £17 million. Neither of these adjustments has any impact on profit for the year, operating profit or earnings per share in 2006, nor on retained earnings, net assets or total equity at either 1 January 2006 or 31 December 2006.
