Barclays 2010 Annual Report Download - page 200

Notes to the financial statements
For the year ended 31st December 2010 continued
1 Significant accounting policies continued
Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include, for
example, the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the marketplace, the
maturity of market modelling and the nature of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are
not observable in the market, the determination of fair value can be more subjective, dependant on the significance of the unobservable input to the
overall valuation. Unobservable inputs are determined based on the best information available, for example by reference to similar assets, similar
maturities or other analytical techniques.
8. Impairment of financial assets
The Group assesses at each balance sheet date whether there is objective evidence that loans and receivables or available for sale financial investments
are impaired. These are considered to be impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result
of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet date that have adversely impacted the
estimated future cash flows of the financial asset or the portfolio. The criteria that the Group uses to determine that there is objective evidence of an
impairment loss include:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or principal payments;
c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not
otherwise consider;
d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
e) the disappearance of an active market for that financial asset because of financial difficulties; or
f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial
recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
(i) adverse changes in the payment status of borrowers in the portfolio;
(ii) national or local economic conditions that correlate with defaults on the assets in the portfolio.
For loans and receivables the Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are
individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no
objective evidence of impairment exists for an individually assessed loan and receivable, whether significant or not, it then includes the asset in a group
of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually
assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. The amount of the loss is recognised using an allowance account and recognised in the income
statement.
Where appropriate, the calculation of the present value of the estimated future cash flows of a collateralised loan and receivable asset reflect the cash
flows that may result from foreclosure costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, loans and receivables are grouped on the basis of similar risk characteristics, taking into
account asset type, industry, geographical location, collateral type, past due status and other relevant factors. These characteristics are relevant to the
estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the
contractual terms of the assets being evaluated.
Future cash flows in a group of loans and receivables that are collectively evaluated for impairment are estimated on the basis of the contractual cash
flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss
experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the period on which the historical
loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.
The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and
actual loss experience.
Following impairment, interest income is recognised using the effective rate of interest which was used to discount the future cash flows for the purpose
of measuring the impairment loss.
When a loan is uncollectable, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary
procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited
to the income statement.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the
impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is
recognised in the income statement.
Equity securities or properties acquired in exchange for loans in order to achieve an orderly realisation are accounted for as a disposal of the loan and an
acquisition of equity securities or investment properties. Where control is obtained over an entity as a result of the transaction, the entity is consolidated.
Any further impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the
original instrument.
198 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10