A1 Basis of preparation

A1 – Basis of preparation

(a) The results for the year ended 31 December 2009 have been prepared using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2009 and have been taken from the group’s Annual Report and Accounts which will be available on the company’s website on 24 March 2010.

During 2007 and 2008, the IASB issued IAS 1, Presentation of Financial Statements: A Revised Presentation, and amendments to IFRS 1, First Time Adoption of IFRS, IFRS 2, Share-Based Payment, IAS 23, Borrowing Costs, IAS 27, Consolidated and Separate Financial Statements, and IAS 32, Financial Instruments: Presentation, and the results of its annual improvements project. IFRIC interpretation 13, Customer Loyalty Programmes, and IFRIC interpretation 16, Hedges of a Net Investment in a Foreign Operation have also been endorsed by the EU. These are all applicable for the current accounting period and are now reflected in the group’s financial reporting, with no material impact.

The preliminary announcement for the year ended 31 December 2009 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The results on an IFRS basis for the full year 2009 and 2008 have been audited by Ernst & Young LLP. The auditor has reported on the 2009 and 2008 financial statements and the report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The group’s 2008 Report and Accounts have been filed with the Registrar of Companies.

After making enquiries, the directors have a reasonable expectation that the company and the group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

(b) 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 these financial statements are in millions of pounds sterling (£m). As supplementary information, consolidated financial information is also presented in euros.

(c) Changes in presentation

(i) The Group has adopted IAS 1 (Revised), Presentation of Financial Statements, as of 1 January 2009. The principal impact of this has been in the following areas:

(a) The titles of some of the prime statements have changed, so that the consolidated statement of recognised gains and losses is now called the consolidated statement of comprehensive income; the reconciliation of movements in consolidated shareholders’ equity is now called the consolidated statement of changes in equity; the consolidated balance sheet is renamed the consolidated statement of financial position; and the consolidated cash flow statement is renamed the consolidated statement of cash flows.

(b) The standard requires the income tax effect of each component of comprehensive income to be disclosed. This information is given in note A5.

(c) Changes in the year in each element of equity must now be shown on the face of the consolidated statement of changes in equity, rather than in the notes.

(d) The standard requires entities to present a comparative statement of financial position as at the beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively, makes a retrospective restatement or reclassifies items in the financial statements. As we have restated certain prior year figures, explained in section (b) below, we have presented three consolidated statements of financial position and supporting notes.

(ii) The Group has also adopted Amendments to IFRS 7, Improving Disclosures about Financial Instruments, as of 1 January 2009. The principal impact of these amendments is to require the following additional disclosures:

(a) An analysis of financial assets and liabilities carried at fair value using a fair value hierarchy that reflects the significance of inputs used in making the fair value measurements;

(b) An analysis of transfers of financial assets and liabilities between different levels of the fair value hierarchy;

(c) A reconciliation from beginning to end of period of financial assets and liabilities whose fair value is based on unobservable inputs; and

(d) An enhanced discussion and analysis of liquidity risk, including a maturity analysis of financial assets held for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk.

Comparative information for the disclosures required by the IFRS 7 amendments is not needed in the first year of application. However, the Group has provided comparatives for the analysis of financial assets according to a fair value hierarchy, which we had previously reported.

(iii) As explained in note A3(c), the Group completed the Initial Public Offering (‘IPO’) of its subsidiary, Delta Lloyd NV (‘Delta Lloyd’), in November 2009. Although the Group has remained the majority shareholder after the IPO, Delta Lloyd is now managed separately from our other European operations, reflecting the change in shareholder base. For this reason, the segmental information given in note A4(a) has been modified to show Delta Lloyd and the Aviva Europe operations separately, with comparatives analysed in the same way for consistency.

(d) Restatement of prior period figures

(i) During 2009, the Group undertook a review of our accounting policy for cash and cash equivalents. Previously, we defined these as normally having a maturity of three months or less from date of acquisition. To avoid ambiguity, our accounting policy has been refined to impose a cut-off date of exactly three months, allowing us to delete “normally” from the policy wording. This refinement of policy has resulted in a reclassification of certain short-dated instruments between cash and cash equivalents and financial investments.

The impact of this refinement has been to increase financial investments and reduce cash and cash equivalents in 2008 by £538 million (2007: £430 million) compared to the amounts previously stated. As a consequence of this, cash flows from operating activities in 2008 have decreased by £58 million, with the effect of exchange rate movements accounting for the remaining £50 million.

(ii) During 2009, the Group’s Dutch subsidiary, Delta Lloyd, carried out a review of the way it had been applying IAS 19, Employee Benefits, in its own financial statements where the corridor method of smoothing actuarial gains and losses in its pension schemes is followed; in accounting for its self-insured pension obligations and intercompany eliminations; and in its reporting to Group where the corridor accounting is reversed. The review concluded that errors had been made locally in applying IAS 19 on the transition to IFRS and in subsequent years, such that gains on certain assets had been reported in provisions, to be released over time, rather than through other comprehensive income. The impact of correcting these errors is to reduce provisions by £129 million as at 1 January 2008, increase deferred tax liabilities by £33 million and increase retained earnings at that date by £96 million.