Barclays 2006 Annual Report Download - page 87

Barclays PLC
Annual Report 2006 83
Operating review
1
Allowances for impairment
Barclays establishes, through charges against profit, an impairment
allowance for the incurred loss inherent in the lending book.
Under IFRS, impairment allowances are recognised where there is
objective evidence of impairment as a result of one or more loss events
that have occurred after initial recognition, and where these events have
had an impact on the estimated future cash flows of the financial asset
or portfolio of financial assets. Impairment of loans and receivables is
measured as the difference between the carrying amount and the
present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate. If the carrying amount is less than
the discounted cash flows, then no further allowance is necessary.
Impairment is measured individually for assets that are individually
significant, and collectively where a portfolio comprises homogenous
assets and where appropriate statistical techniques are available.
In terms of individual assessment, the trigger point for impairment is
formal classification of an account as exhibiting serious financial
problems and where any further deterioration is likely to lead to failure.
Two key inputs to the cash flow calculation are the valuation of all
security and collateral and the timing of all asset realisations, after
allowing for all attendant costs. This method applies in the corporate
portfolios – Business Banking, Barclays Capital and certain areas within
International Retail and Commercial Banking and Barclaycard.
For collective assessment, the trigger point for impairment is the
missing of a contractual payment. The impairment calculation is based
on a roll-rate approach, where the percentage of assets that move from
the initial delinquency to default are derived from statistical probabilities
based on experience. Recovery amounts and contractual interest rates
are calculated using a weighted average for the relevant portfolio.
This method applies to parts of Global Retail and Commercial Banking
– International, Barclaycard and UK Banking and is consistent with
Barclays policy of raising an allowance as soon as impairment is
identified.
Unidentified impairment allowances, albeit significantly lower in
amount than those reported above, are also raised to cover losses
which are judged to be incurred but not yet specifically identified in
customer exposures at the balance sheet date, and which, therefore,
have not been specifically reported.
The incurred but not yet reported calculation is based on the asset’s
probability of moving from the performing portfolio to being specifically
identified as impaired within the given emergence period and then on to
default within a specified period. This is calculated on the present value
of estimated future cash flows discounted at the financial asset’s
original effective interest rate.
The emergence periods vary across businesses and are based on actual
experience and are reviewed on an annual basis. This methodology
ensures that the Group only captures the loss incurred at the balance
sheet date.
These impairment allowances are reviewed and adjusted at least
quarterly by an appropriate charge or release of the stock of impairment
allowances based on statistical analysis and management judgement.
Where appropriate, the accuracy of this analysis is periodically assessed
against actual losses.
Impairment allowances/provisions stock coverage of non-
performing loans and potential credit risk loans
(See also Table 31 on page 107.)
(See also Table 32 on page 107.)
Including Absa, the NPL coverage ratio decreased to 65.6% (2005:
66.2%) whilst the PCRL coverage ratio increased to 57.0% (2005:
56.2%) at the end of 2006.
02 03 04(a) 05 06
0
10
20
40
30
60
50
70
Impairment/provisions coverage of PCRLs %
UK GAAP IFRS
57.0
56.2
56.0
54.6
52.8
65.6
66.2
66.9
71.5
65.9
02 03 04(a) 05 06
0
10
20
40
30
60
50
70
80
Impairment/provisions coverage of NPLs %
UK GAAP IFRS
Risk management
Allowances for impairment
Note
(a) Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005.