Notes to the consolidated financial statements 11-20

11 – Auditors’ remuneration

The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to its principal auditors, Ernst & Young LLP, in respect of the audit of these accounts is shown below, together with fees payable in respect of other work.

	2005 £m	2004 £m
Audit services
Statutory audit	6.9	7.0
Audit-related regulatory and supplementary reporting	3.1	3.1
Further assurance services	2.6	3.3
Other services	0.5	1.5
	13.1	14.9

In addition to the above amounts payable to the principal auditors, fees for audit services of £2.9 million (2004: £2.0 million) were payable to other firms. The total fees payable for audit services were therefore £12.9 million (2004: £12.1 million).

Audit-related supplementary reporting is in respect of the audit of the Group’s EEV figures. Although EEV is the Group’s primary management reporting basis and our disclosures require a full audit, the relevant fees cannot be classified as being for statutory audit.

Further assurance services included advice on accounting and regulatory matters, restatement of supplementary reporting opening balance sheet, reporting on internal controls and corporate governance matters, and due diligence work.

12 – Tax

(a) Tax charged to the income statement

(i) The total tax charge comprises:

	2005 £m	2004 £m
Current tax
For the year	799	475
Prior year adjustments	(212)	(92)
Total current tax	587	383
Deferred tax
Origination and reversal of timing differences	881	272
Changes in tax rates or tax laws	(5)	(1)
Write down of deferred tax assets	89	–
Total deferred tax	965	271
Total tax charged to income statement (note 12c)	1,552	654

(ii) The Group, as a proxy for policyholders in the UK, Ireland and Australia, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Australian life insurance policyholder returns is included in the tax charge. The tax expense attributable to policyholders’ returns included in the charge above is £922 million (2004: £383 million).

(iii) The tax charge can be analysed as follows:

	2005 £m	2004 £m
United Kingdom tax	1,150	280
Overseas tax	402	374
	1,552	654

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce current tax expense and deferred tax expense by £49 million and £33 million, respectively (2004: £148 million and £nil, respectively).

(b) Tax (credited)/charged to equity

(i) The total tax (credit)/charge comprises:

	2005 £m	2004 £m
Current tax	(13)	–
Deferred tax	(262)	15
Total tax (credited)/charged to equity	(275)	15

(ii) The tax credit attributable to policyholders’ returns included in the credit above is £3 million (2004: £nil).

(c) Tax reconciliation

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:

	2005 £m	2004 £m
Profit before tax	3,450	2,025
Tax calculated at standard UK corporation tax rate of 30% (2004: 30%)	1,035	608
Different basis of tax for UK life insurance	616	217
Adjustment to tax charge in respect of prior years	(253)	(88)
Non-assessable dividends	(26)	(30)
Non-taxable (profit)/loss on sale of subsidiaries and associates	(4)	12
Disallowable expenses	55	65
Different basis of tax on overseas profits/(losses)	168	(13)
Deferred tax assets not recognised	(25)	(120)
Other	(14)	3
Total tax charged to income statement (note 12a)	1,552	654

13 – Earnings per share

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

	2005 £m	2004 £m
Profit for the year	1,898	1,371
Amount attributable to minority interests	(131)	(96)
Cumulative preference dividends for the year	(17)	(17)
Coupon payments on direct capital instrument (DCI) (net of tax)	(29)	–
Profit attributable to ordinary shareholders	1,721	1,258

(ii) Basic earnings per share is calculated as follows:

	2005			2004
	Before tax £m	Net of tax, minorities preference dividends and DCI appropriation £m	Per share p	Before tax £m	Net of tax, minorities preference dividends and DCI appropriation £m	Per share p
Operating profit attributable to ordinary shareholders	2,128	1,415	60.5	1,669	1,221	54.1
Adjusted for the following:
– Impairment of goodwill (note 15)	(43)	(43)	(1.8)	(41)	(41)	(1.8)
– Amortisation and net impairment of acquired additional value of in-force business (note 16 & 18)	(73)	(73)	(3.1)	(85)	(85)	(3.8)
– Amortisation and net impairment of intangibles (note 16)	(45)	(42)	(1.8)	(7)	(7)	(0.3)
– Financial Services Compensation Scheme and other levies	–	–	–	(49)	(29)	(1.3)
– Short-term fluctuation in return on investments backing general insurance and health business (note 8b)	517	430	18.2	161	195	8.7
– Profit on the disposal of subsidiaries and associates (note 3b)	153	110	4.7	34	34	1.5
– Integration costs (note 3a(i))	(109)	(76)	(3.2)	–	–	–
– Exceptional costs for termination of operations (note 3d)	–	–	–	(40)	(30)	(1.3)
Profit attributable to ordinary shareholders	2,528	1,721	73.5	1,642	1,258	55.8

(iii) The profit attributable to ordinary shareholders in the table above is calculated as follows:

	Operating profit £m	Adjusting items £m	Total £m	Operating profit £m	Adjusting items £m	Total £m
	2005			2004
Profit before tax	2,128	400	2,528	1,669	(27)	1,642
Tax attributable to shareholders’ profits	(536)	(94)	(630)	(319)	48	(271)
Minority interests	(131)	–	(131)	(112)	16	(96)
Preference dividends	(17)	–	(17)	(17)	–	(17)
Coupon payments in respect of direct capital instrument (net of tax)	(29)	–	(29)	–	–	–
Profit attributable to ordinary shareholders	1,415	306	1,721	1,221	37	1,258

Earnings per share has been calculated based on the operating profit before impairment of goodwill and other non-operating items, after tax, attributable to ordinary shareholders, as well as on the profit attributable to ordinary shareholders. The directors believe the former earnings per share figure provides a better indication of operating performance.

(iv) The calculation of basic earnings per share uses a weighted average of 2,340 million (2004: 2,256 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2005 was 2,396 million (2004: 2,282 million).

(b) Diluted earnings per share

Diluted earnings per share is calculated as follows:

Total £m	Total £m
2005	2004
		Profit attributable to ordinary shareholders	1,721	2,340	73.5	1,258	2,256	55.8
		Dilutive effect of share awards and options	–	20	(0.6)	–	18	(0.5)
		Diluted earnings per share	1,721	2,360	72.9	1,258	2,274	55.3

Diluted earnings per share on operating profit attributable to ordinary shareholders is 60.0p (2004: 53.7p).

14 – Dividends and appropriations

	2005 £m	2004 £m
Ordinary dividends declared and charged to equity in the year
Final 2003 – 15.15 pence per share, paid on 17 May 2004	–	342
Interim 2004 – 9.36 pence per share, paid on 17 November 2004	–	211
Final 2004 –16.00 pence per share, paid on 17 May 2005	364	–
Interim 2005 – 9.83 pence per share, paid on 17 November 2005	234	–
	598	553
Preference dividends declared and charged to equity in the year	17	17
Coupon payments on direct capital instrument	42	–
	657	570

Subsequent to 31 December 2005, the directors proposed a final dividend for 2005 of 17.44 pence per ordinary share, £418 million in total, making a total dividend for the year of 27.27 pence (2004: 25.36 pence). Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2006 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2006.

Interest on the direct capital instrument issued in November 2004 is treated as an appropriation of retained profits and, accordingly, it is accounted for when paid. Tax relief is obtained at a rate of 30%.

Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 1 March 2006.

15 – Goodwill

(a) Carrying amount

	2005 £m	2004 £m
Gross amount
At 1 January	1,225	1,145
Additions	1,178	90
Disposals	(21)	(15)
Foreign exchange rate movements	(23)	5
At 31 December	2,359	1,225
Accumulated impairment
At 1 January	(41)	–
Impairment losses	(43)	(41)
Disposals	–	–
Foreign exchange rate movements	(1)	–
At 31 December	(85)	(41)
Carrying value at 31 December	2,274	1,184

Goodwill arising on acquisitions completed before 1 January 1998 was charged directly to reserves. Goodwill arising on the Group’s investment in joint ventures and associates is included within the carrying value of those investments (see notes 17 and 18).

Of the £1,139 million arising on the acquisition of the RAC group, £1,054 million relating to subsidiaries is included in the additions figure above and £85 million relating to joint ventures is dealt with in note 17(a).

(b) Goodwill allocation and impairment testing

The carrying amount of goodwill allocated to Spain (long-term business), United Kingdom (general insurance and health) and RAC (non-insurance operations) is considered significant in comparison with the total carrying amount of goodwill.

A summary of the goodwill allocated to cash-generating units is presented below.

	2005 £m	2004 £m	2005 £m	2004 £m	2005 £m	2004 £m	2005 £m	2004 £m	2005 £m	2004 £m
	Spain (Long-term business)		United Kingdom (General insurance and health)		RAC (non-insurance operations)		Other		Total
Carrying amount of goodwill	503	456	311	149	892	–	568	579	2,274	1,184
Carrying amount of intangibles with indefinite useful lives	–	–	185	–	75	–	–	–	260	–
	503	456	496	149	967	–	568	579	2,534	1,184

As explained in accounting policy M, the carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. The tests led to impairment of goodwill in the amount of £43 million.

Goodwill and intangibles with indefinite useful lives have been tested for impairment in these businesses as follows:

Spain (long-term business)

The recoverable amount of the Spanish unit has been determined based on a fair value less costs to sell calculation. This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed its recoverable amount.

Key assumptions used for the calculation were:

Embedded value represents the shareholder interest in the life business and is calculated in accordance with the European Embedded Value (EEV) principles. The embedded value is the total of the net worth of the life business and the value of the in-force business. The underlying methodology and assumptions have been reviewed by a firm of actuarial consultants and by the Group’s auditors;
New business contribution represents the present value of projected future distributable profits generated from business written in a period. This is based on business plans approved by management;
Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s best estimate of future growth. The rate is in line with industry expectations; and
Risk adjusted discount rate represents the rate used to discount expected profits from future new business. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years may differ from that assumed.

United Kingdom (general insurance and health)

The recoverable amount of the United Kingdom general insurance and health unit has also been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three year period and a risk adjusted discount rate of 10.45% (2004: 9.63%). Cash flows beyond that three-year period have been extrapolated using a steady 3% growth rate (2004: 5%). The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and intangible assets with indefinite useful lives and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed its recoverable amount.

Key assumptions used for the calculation were:

Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflect the best estimate of future profits based on both historical experience and expected growth rates for the UK general insurance industry. Some of the assumptions that underline the budgeted operating profit include market share, premium rate changes, claims inflation and commission rates.
Growth rate represents the rate used to extrapolate future cash flows beyond the business plan period and has been based upon latest information available regarding future and past growth rates. The growth rate is considered to be consistent with both past experience and external sources of data (ABI Annual Market Statistics).

RAC (non–insurance operations)

The recoverable amount of the RAC (non-insurance operations) has also been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three year period and a risk adjusted discount rate of 10.45%. Cash flows beyond that three year period have been extrapolated using a steady 2% growth rate. The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and intangible assets with indefinite useful lives and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed its recoverable amount.

Key assumptions used for the calculation were:

Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflect the best estimate of future profits based on both historical experience and expected growth. Some of the assumptions that underline the budgeted operating profit include market share, fee income and customer numbers.

Other

During the year, goodwill allocated to a Life cash-generating unit in Germany was tested for impairment. Following the impairment test, an impairment charge of £21 million has been recognised in the income statement. The impairment charge arose as a result of the low interest rate environment in which the cash generating unit operates in and the further decline in interest rates during the year. The recoverable amount for the cash-generating unit has been measured based on a value in use calculation. A pre-tax discount rate of 6.75% was used in the value in use calculation and cash flows beyond the plan period have been extrapolated using a steady 4.85% growth rate.

The remaining £22 million related to other small European businesses. The 2004 impairment charge of £41 million comprise £21 million on one non-insurance Dutch operation, £17 million on other small European businesses and £3 million on other operations.

16 – Acquired value of in-force business (AVIF) and intangible assets

	AVIF £m	Intangible assets £m	Total £m
Gross amount
At 1 January 2004	578	166	744
Additions	–	5	5
Acquisition of subsidiaries	30	61	91
Foreign exchange rate movements	5	1	6
At 31 December 2004	613	233	846
Additions	13	60	73
Acquisition of subsidiaries	–	333	333
Foreign exchange rate movements	(12)	(1)	(13)
At 31 December 2005	614	625	1,239
Accumulated amortisation
At 1 January 2004	(182)	(74)	(256)
Amortisation for the year	(51)	(7)	(58)
Impairment losses recognised	(13)	–	(13)
Foreign exchange rate movements	(2)	(1)	(3)
At 31 December 2004	(248)	(82)	(330)
Amortisation for the year	(26)	(39)	(65)
Impairment losses recognised	(29)	(6)	(35)
Foreign exchange rate movements	4	(1)	3
At 31 December 2005	(299)	(128)	(427)
Carrying amount
At 1 January 2004	396	92	488
At 31 December 2004	365	151	516
At 31 December 2005	315	497	812
Less: amount classified as held for sale	–	(9)	(9)
	315	488	803

Of the £392 million of intangibles acquired in the RAC group, £310 million relating to subsidiaries is included in the acquisitions figure above and £82 million relating to joint ventures is dealt with in note 17(a). Note 3(a)(i) gives details of the nature of these assets, some of which have indefinite lives, and of the amortisation periods adopted.

17 – Investments in joint ventures

(a) Carrying amount

	Goodwill and intangibles (see notes 15(a) and 16) £m	Equity interests £m	Loans £m	Total 2005 £m	Total 2004 £m
At 1 January	–	1,255	–	1,255	871
Share of results before tax	–	332	–	332	234
Share of tax	–	(6)	–	(6)	–
Share of profit after tax	–	326	–	326	234
Acquisitions and additions	167	587	–	754	272
Disposals and reductions in group interests	–	(43)	–	(43)	–
Reclassification to subsidiaries	–	(8)	–	(8)	(89)
Dividends received	–	(34)	–	(34)	(33)
Additional loans	–	–	128	128	–
Foreign exchange rate movements	–	1	–	1	–
Other movements and amounts classified as held for sale	(167)	(83)	–	(250)	–
Movements in carrying amount	–	746	128	874	384
At 31 December	–	2,001	128	2,129	1,255

The loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination of the relevant partnership.

(b) Property management undertakings

(i) As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.

Most of the PLPs have raised external debt, secured on their respective property portfolios. The lenders are only entitled to obtain payment, of both interest and principal, to the extent that there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any company in the Aviva Group.

Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the Group’s partnership share in the PLP (including its indirect take via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as jointly-controlled entities. These are accounted for as joint ventures, and are covered in this note. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are included in financial investments at their fair value.

(ii) The principal joint ventures are as follows:

Company	GP proportion held	PLP proportion held
Airport Property Partnership	50.0%	50.0%
Apia Regional Office Fund	50.0%	70.0%
Ashtenne Industrial Fund Limited Partnership	66.7%	40.2%
The Global Switch Limited Partnership	25.0%	25.0%
The Junction Limited Partnership	50.0%	48.8%
The Mall Limited Partnership	50.0%	38.2%
Paddington Central 1 Limited Partnership	50.0%	50.0%
Queensgate Limited Partnership	50.0%	50.0%
Quercus Property Partnership Limited	50.0%	66.4%

All the above entities perform property ownership and management activities, and are incorporated and operate in Great Britain. The Global Switch Limited Partnership has subsidiaries in several European countries which carry out property ownership and management activities locally. All these investments are held by subsidiary entities.

(c) Other

The Group also has a 50% holding in AVIVA-COFCO Life Insurance Company Limited, a life assurance company incorporated and operating in China. These shares are held by the Company, with a share of net assets of £10 million (2004: £14 million) and a fair value of £22 million (2004: £22 million).

(d) Additional information

Summarised aggregate financial information on the Group’s interests in its joint ventures is as follows:

	2005 £m	2004 £m
Income	394	249
Expenses	(62)	(15)
Share of profit before tax	332	234
Long-term assets	3,333	2,049
Current assets	116	110
Total assets	3,449	2,159
Long-term liabilities	(1,311)	(743)
Current liabilities	(137)	(161)
Total liabilities	(1,448)	(904)
Share of net assets	2,001	1,255

The joint ventures have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the joint ventures.

18 – Investments in associates

(a) Carrying amount

	Goodwill £m	Equity interests £m	Loans £m	Total 2005 £m	Total 2004 £m
At 1 January	247	615	11	873	1,108
Share of results before tax	–	39	–	39	28
Share of tax	–	(7)	–	(7)	(20)
Share of results after tax	–	32	–	32	8
Amortisation of acquired value of in-force business	–	(18)	–	(18)	(21)
Share of profit/(loss) after tax	–	14	–	14	(13)
Acquisitions	5	65	–	70	83
Disposals	–	–	–	–	(275)
Fair value gains/(losses) taken to equity	–	(2)	–	(2)	–
Dividends received	–	(61)	–	(61)	(19)
Foreign exchange rate movements	–	(4)	–	(4)	(11)
Additional loans/(loans repaid)	–	–	–	–	1
Other movements and amounts classified as held for sale	–	(5)	–	(5)	(1)
Movements in carrying amount	5	7	–	12	(235)
At 31 December	252	622	11	885	873

The loans are not secured and no guarantees were received in respect thereof. They bear an annual interest of 10%, and will be settled in cash through monthly payments over the next two years.

(b) The principal associates included above are:

Company	Type of business	Class of share	Proportion held	Country of incorporation and operation
Aviva Life Insurance Company India Pvt. Limited	Insurance	Ordinary Rs1 shares	26.0%	India
ProCapital S.A.	Online brokerage	Ordinary €1 shares	43.5%	France
RBSG Collective Investments Limited	Investment	Ordinary £1 shares	49.99%	Great Britain
RBS Life Investments Limited	Insurance	Ordinary £1 shares	49.99%	Great Britain
The British Aviation Insurance Company Limited	Insurance	Ordinary £1 shares	38.1%	Great Britain

All investments in principal associates are unlisted and are held by subsidiaries.

(c) Additional information

(i) Summarised aggregate financial information on the Group’s interests in its associates is as follows:

	2005 £m	2004 £m
Revenues	277	445
Share of profit before tax	39	28
Assets	2,897	2,786
Liabilities	(2,275)	(2,171)
Share of net assets	622	615

The associates have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the associates.

(ii) In France, the Group has invested in a number of specialised investment companies. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. Where the Group owns less than 50% of such companies, its interests are included in the consolidated balance sheet within financial investments or cash and cash equivalents as appropriate.

(d) Impairment testing

The Group’s investments in RBS Life Investments Limited and RBSG Collective Investments Limited have been tested for impairment by comparing their carrying values (which include goodwill which arose on their acquisition) with their recoverable amounts. The recoverable amounts for both the investments have been determined based on value in use calculations. The calculations use cash flow projections based on business plans approved by management covering a five year period and a risk adjusted discount rate of 9.9%. Cash flows beyond that five-year period have been extrapolated using a growth rate of 4.5%.The recoverable amounts significantly exceed the carrying values of both the investments and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts.

19 – Property and equipment

	Properties under construction £m	Owner- occupied properties £m	Motor vehicles £m	Computer equipment £m	Other assets £m	Total £m
Cost or valuation
At 1 January 2004	145	442	39	514	297	1,437
Additions	1	8	14	95	65	183
Capitalised expenditure on existing assets	19	13	–	–	–	32
Acquisitions of subsidiaries	–	–	–	–	7	7
Disposal of subsidiaries	–	(7)	–	(6)	(6)	(19)
Disposals	(63)	(100)	(26)	(23)	(38)	(250)
Transfers to investment property	(43)	40	–	–	–	(3)
Fair value gains (see note 32)	–	42	–	–	–	42
Foreign exchange rate movements	(2)	3	–	2	2	5
At 31 December 2004	57	441	27	582	327	1,434
Additions	10	2	18	106	63	199
Capitalised expenditure on existing assets	7	–	–	–	–	7
Acquisitions of subsidiaries	–	35	44	9	49	137
Disposals	(19)	(7)	–	(42)	(70)	(138)
Fair value gains (see note 32)	–	33	–	–	–	33
Foreign exchange rate movements	(1)	(5)	–	–	(1)	(7)
At 31 December 2005	54	499	89	655	368	1,665


Depreciation
At 1 January 2004			(18)	(319)	(217)	(554)
Charge for the year	–	–	(8)	(68)	(21)	(97)
Disposals	–	–	9	17	22	48
Disposal of subsidiaries	–	–	–	4	4	8
Impairment losses	–	–	–	(19)	(6)	(25)
Foreign exchange rate movements	–	–	–	(2)	–	(2)
At 31 December 2004	–	–	(17)	(387)	(218)	(622)
Charge for the year	–	–	(4)	(77)	(31)	(112)
Disposals	–	–	–	26	12	38
Foreign exchange rate movements	–	–	–	1	–	1
At 31 December 2005	–	–	(21)	(437)	(237)	(695)
Carrying amount
At 1 January 2004	145	442	21	195	80	883
At 31 December 2004	57	441	10	195	109	812
At 31 December 2005	54	499	68	218	131	970
Less assets classified as held for sale	–	–	–	–	(85)	(85)
	54	499	68	218	46	885

Impairment losses/reversal of impairment losses recognised in the income statement and in equity were £nil (2004: £25 million) and £nil (2004: £nil) respectively.

Owner-occupied properties are stated at their revalued amounts as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated on the basis of existing use, being the estimated arms-length value at which the properties could be exchanged with vacant possession and without allowing for alternatives to their current use.

If owner-occupied properties were stated on a historical cost basis, the carrying amount would be as follows:

	2005 £m	2004 £m
Cost	449	359
Accumulated depreciation	(43)	(36)
Carrying amount	406	323

The Group has no material finance leases for property and equipment.

20 – Investment property

	Freehold £m	Leasehold £m	Total £m
Carrying value
At 1 January 2004	7,692	2,032	9,724
Additions	992	219	1,211
Capitalised expenditure on existing properties	93	17	110
Fair value gains	1,056	98	1,154
Disposals	(747)	(409)	(1,156)
Transfers from property and equipment	3	–	3
Foreign exchange rate movements	11	–	11
At 31 December 2004	9,100	1,957	11,057
Additions	1,596	173	1,769
Capitalised expenditure on existing properties	126	61	187
Fair value gains	1,169	402	1,571
Disposals	(1,171)	(80)	(1,251)
Foreign exchange rate movements	(55)	(3)	(58)
At 31 December 2005	10,765	2,510	13,275

Investment properties are stated at their market values as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, assuming no future growth in rental income. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties.

The fair value of investment properties leased to third parties under operating leases was as follows:

	2005 £m	2004 £m
Freeholds	9,036	9,065
Long leaseholds – over 50 years	3,018	1,939
Short leaseholds – under 50 years	–	6
	12,054	11,010

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Aviva plc Annual report and accounts 2005