Barclays 2006 Annual Report Download - page 159

Barclays PLC
Annual Report 2006 155
Financial statements
3
historical data. This grade can be derived from different sources
depending upon the borrower (e.g. internal model, credit rating
agency). The general provision also takes into account the economic
climate in the market in which the Group operates and the level of
security held in relation to each category of counterparty. The general
provision includes a specifically identified element to cover country
transfer risk calculated on a basis consistent with the overall general
provision calculation. General provisions are created with respect to
the recoverability of assets arising from off-balance sheet exposures
in a manner consistent with the general provisioning methodology.
The aggregate specific and general provisions which are made during
the year, less amounts released and recoveries of bad debts previously
written off, are charged against operating profit and are deducted from
loans and advances. Impaired lendings are written off against the
balance sheet asset and provision in part, or in whole, when the extent
of the loss incurred has been confirmed.
If the collection of interest is doubtful, it is credited to a suspense
account and excluded from interest income in the income statement.
Although it continues to be charged to the customers’ accounts, the
suspense account in the balance sheet is netted against the relevant
loan. If the collection of interest is considered to be remote, interest is
no longer applied and suspended interest is written off. Loans on which
interest is suspended are not reclassified as accruing interest until
interest and principal payments are up to date and future payments are
reasonably assured.
Assets acquired in exchange for advances in order to achieve an orderly
realisation continue to be reported as advances. The asset acquired is
recorded at the carrying value of the original advance updated as at the
date of the exchange. Any subsequent impairment is accounted for as
a specific provision.
9. Sale and repurchase agreements (including stock borrowing
and lending)
Securities may be lent or sold subject to a commitment to repurchase
them (a ‘repo’). Such securities are retained on the balance sheet when
substantially all the risks and rewards of ownership remain with the
Group, and the counterparty liability is included separately on the
balance sheet as appropriate.
Similarly, where the Group borrows or purchases securities subject to
a commitment to resell them (a ‘reverse repo’) but does not acquire
the risks and rewards of ownership, the transactions are treated as
collateralised loans, and the securities are not included in the
balance sheet.
The difference between sale and repurchase price is accrued over the life
of the agreements using the effective interest method. Securities lent to
counterparties are also retained in the financial statements. Securities
borrowed are not recognised in the financial statements, unless these
are sold to third parties, at which point the obligation to repurchase
the securities is recorded as a trading liability at fair value and any
subsequent gain or loss included in net trading income.
Prior to 1st January 2005
The cash legs of repos and reverse repos are included within loans and
advances to banks, loans and advances to customer, deposits by banks
and customer accounts. The Group aims to earn net interest income
and net trading income from these activities, as well as funding its own
holdings of securities. The difference between sale and repurchase and
purchase and resale prices for such transactions, including dividends
received where appropriate, is charged or credited to the income
statement over the life of the relevant transactions.
10. Securitisation transactions
Certain Group undertakings have issued debt securities or have entered
into funding arrangements with lenders in order to finance specific
loans and advances to customers.
All financial assets continue to be held on the Group balance sheet, and
a liability recognised for the proceeds of the funding transaction, unless:
(i) substantially all the risks and rewards associated with the financial
instruments have been transferred, in which case, the assets are
derecognised in full; or
(ii) if a significant portion, but not all, of the risks and rewards have
been transferred, the asset is derecognised entirely if the transferee
has the ability to sell the financial asset, otherwise the asset
continues to be recognised only to the extent of the Group’s
continuing involvement.
Where (i) or (ii) above applies to a fully proportionate share of all or
specifically identified cash flows, the relevant accounting treatment
is applied to that proportion of the asset.
11. Collateral and netting
The Group enters into master agreements with counterparties
whenever possible and, when appropriate, obtains collateral. Master
agreements provide that, if an event of default occurs, all outstanding
transactions with the counterparty will fall due and all amounts
outstanding will be settled on a net basis.
Collateral
The Group obtains collateral in respect of customer liabilities where this
is considered appropriate. The collateral normally takes the form of a
lien over the customer’s assets and gives the Group a claim on these
assets for both existing and future liabilities.
The Group also receives collateral in the form of cash or securities in
respect of other credit instruments, such as stock borrowing contracts,
and derivative contracts in order to reduce credit risk. Collateral received
in the form of securities is not recorded on the balance sheet. Collateral
received in the form of cash is recorded on the balance sheet with a
corresponding liability. These items are assigned to deposits received
from bank or other counterparties. Any interest payable or receivable
arising is recorded as interest expense or interest income respectively
except for funding costs relating to trading activities which are recorded
in net trading income.
Netting
Financial assets and liabilities are offset and the net amount reported
in the balance sheet if, and only if, there is a legally enforceable right to
set off the recognised amounts and there is an intention to settle on a
net basis, or to realise an asset and settle the liability simultaneously.
In many cases, even though master netting agreements are in place,
the lack of an intention to settle on a net basis results in the related
assets and liabilities being presented gross in the balance sheet.
12. Derivatives and hedge accounting
Derivatives are used to hedge interest rate, exchange rate, commodity,
and equity exposures and exposures to certain indices such as house
price indices and retail price indices related to non-trading positions.
In addition, the use of derivatives and their sale to customers as risk
management products is an integral part of the Group’s trading
activities. Derivatives entered into for hedging purposes and for trading
purposes include foreign exchange, interest rate, credit, equity and
commodity derivatives mainly in the form of swaps, forwards, options
and combinations of these instrument types.
Derivatives
Derivatives are measured initially at fair value and subsequently
remeasured to fair value. Fair values are obtained from quoted prices
prevailing in active markets, including recent market transactions, and