Barclays 2009 Annual Report Download - page 198

196 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Consolidated accounts Barclays PLC
Accounting policies
continued
Regular way purchases of held to maturity financial assets are
recognised on trade date, being the date on which the Group commits
to purchase the asset.
Available for sale
Available for sale assets are non-derivative financial assets that are
designated as available for sale and are not categorised into any of the other
categories described above. They are initially recognised at fair value
including direct and incremental transaction costs. They are subsequently
held at fair value. Gains and losses arising from changes in fair value are
included as a separate component of equity until sale when the cumulative
gain or loss is transferred to the income statement. Interest determined
using the effective interest method (see accounting policy 6), impairment
losses and translation differences on monetary items are recognised in the
income statement.
Regular way purchases and sales of available for sale financial
instruments are recognised on trade date, being the date on which the
Group commits to purchase or sell the asset.
A financial asset classified as available for sale that would have met the
definition of loans and receivables may only be transferred from the available
for sale classification where the Group has the intention and the ability to
hold the asset for the foreseeable future or until maturity.
Embedded derivatives
Some hybrid contracts contain both a derivative and a non-derivative
component. In such cases, the derivative component is termed an
embedded derivative. Where the economic characteristics and risks of the
embedded derivatives are not closely related to those of the host contract,
and the host contract itself is not carried at fair value through profit or loss,
the embedded derivative is bifurcated and reported at fair value with gains
and losses being recognised in the income statement.
Profits or losses cannot be recognised on the initial recognition of
embedded derivatives unless the host contract is also carried at fair value.
Derecognition of financial assets
The Group derecognises a financial asset, or a portion of a financial asset,
where the contractual rights to that asset have expired. Derecognition is also
appropriate where the rights to further cash flows from the asset have been
transferred to a third party and, with them, either:
(i) substantially all the risks and rewards of the asset; or
(ii) significant risks and rewards, along with the unconditional ability to sell
or pledge the asset.
Where significant risks and rewards have been transferred, but the
transferee does not have the unconditional ability to sell or pledge the asset,
the Group continues to account for the asset to the extent of its continuing
involvement (‘continuing involvement accounting’).
To assess the extent to which risks and rewards have been transferred,
it is often necessary to perform a quantitative analysis. Such an analysis will
compare the Group’s exposure to variability in asset cash flows before the
transfer with its retained exposure after the transfer.
Where neither derecognition nor continuing involvement accounting
is appropriate, the Group continues to recognise the asset in its entirety
and recognises any consideration received as a financial liability.
Loan commitments
Loan commitments, where the Group has a past practice of selling the
resulting assets shortly after origination, are held at fair value through profit
or loss. Other loan commitments are accounted for in accordance with
accounting policy 23.
Financial liabilities
Financial liabilities are measured at amortised cost, except for trading
liabilities and liabilities designated at fair value, which are held at fair value
through profit or loss. Financial liabilities are derecognised when
extinguished.
An exchange of an existing debt instrument for a new instrument with
the lender on substantially different terms is accounted for as an
extinguishment of the original financial liability and the recognition of a new
financial liability. An assessment is made as to whether the terms are
substantially different considering qualitative and quantitive characteristics.
For example, if the discounted present value calculated using the original
effective interest rate of the cash flows under the new terms, including fees,
is at least 10 per cent different from the discounted present value of the
remaining cash flows of the original financial liability, or if the qualitative
assessment concludes that the nature and risk profile of the original financial
liability is materially different from that of the new financial liability based on
the terms of the instruments including repayment terms, coupon terms and
call options, the original financial liability is extinguished.
When an exchange is accounted for as an extinguishment, any costs or
fees incurred are recognised as part of the gain or loss on the
extinguishment. The difference between the carrying amount of a financial
liability extinguished or transferred to another party and the consideration
paid, including any non-cash assets transferred or liabilities assumed, is
recognised in profit or loss.
Determining fair value
Where the classification of a financial instrument requires it to be stated at
fair value, fair value is determined by reference to a quoted market price for
that instrument or by using a valuation model. Where the fair value is
calculated using valuation models, the methodology is to calculate the
expected cash flows under the terms of each specific contract and then
discount these values back to a present value. These models use as their
basis independently sourced market parameters including, for example,
interest rate yield curves, equities and commodities prices, option volatilities
and currency rates. For financial liabilities measured at fair value, the carrying
amount reflects the effect on fair value of changes in own credit spreads
derived from observable market data, such as spreads on Barclays issued
bonds or credit default swaps. Most market parameters are either directly
observable or are implied from instrument prices. The model may perform
numerical procedures in the pricing such as interpolation when input values
do not directly correspond to the most actively traded market trade
parameters. However, where valuations include significant unobservable
inputs, the transaction price is deemed to provide the best evidence of initial
fair value for accounting purposes. As such, profits or losses are recognised
upon trade inception only when such profits can be measured solely by
reference to observable market data. For valuations that include significant
unobservable inputs, the difference between the model valuation and the
initial transaction price is recognised in profit or loss: