Barclays 2010 Annual Report Download - page 258

Notes to the financial statements
For the year ended 31st December 2010 continued
41 Fair value of financial instruments continued
Gains and losses on Level 3 financial assets and liabilities
The following table discloses the gains and losses recognised in the year arising on Level 3 financial assets and liabilities held at year end.
Gains and losses recognised during the period
on Level 3 financial assets and liabilities held Trading
portfolio
assets
£m
Financial
assets
designated
at fair value
£m
Available for
sale assets
£m
Trading
portfolio
liabilities
£m
Financial
liabilities
designated
at fair value
£m
Net
derivative
financial
instruments
£m
Total
£m
As at 31st December 2010
Recognised in the income statement
– trading income 345 215 – (1) (528) (66) (35)
– other income – 115 (166) – – – (51)
Total gains or losses recognised in other comprehensive
income – – 133 – – – 133
Total 345 330 (33) (1) (528) (66) 47
As at 31st December 2009
Recognised in the income statement
– trading income (736) (3,034) – 8 (269) (2,817) (6,848)
– other income – (452) (140) – – – (592)
Total gains or losses recognised in other comprehensive
income – – (65) – – – (65)
Total (736) (3,486) (205) 8 (269) (2,817) (7,505)
Valuation techniques
Current year valuation methodologies were consistent with the prior year unless otherwise noted below. These methodologies are commonly used by
market participants.
The valuation techniques used for the main products that are not determined by reference to unadjusted quoted prices (Level 1), are described below.
Commercial real estate loans
This category includes lending on a range of commercial property types including retail, hotels, office and development properties.
Fair value is calculated using a risk adjusted spread based methodology performed on a loan by loan basis with consideration of characteristics such as
property type, geographic location, yields, credit quality and property performance reviews.
The valuation inputs are reviewed with reference to published bond indices. Initial spreads are sourced from market quoted origination spreads by
property type and classified into Loan-to-Value (LTV) buckets which are adjusted for internal credit rating and subordination of the loans. The internal
credit ratings used in the valuation model are subject to a monthly review process. The model is calibrated monthly based on external quotes of new
origination property type spreads and the latest internal credit ratings.
The valuations are considered unobservable due to the bespoke nature of the instruments.
Asset backed products
These are debt and derivative products that are linked to the cash flows of a pool of referenced assets. This category includes asset backed loans, CDOs
(cash underlyings), CLOs, asset backed credit derivatives, asset and mortgage backed securities.
Valuations are determined using industry standard cash flow models that calculate fair value based on loss projections, prepayment, recovery and
discount rates. These parameters are determined by reference to underlying collateral performance, independent research, ABX indices, broker quotes,
observable trades on similar securities and third party pricing sources.
Within this population, certain valuation inputs are unobservable for non-investment grade ABS, non-agency residential mortgage backed securities
(RMBS) and asset backed credit derivatives. Where unobservable, a parameter will be set with reference to an observable proxy. The determination
of parameter levels takes account of a range of factors such as deal vintage, underlying asset composition (historical losses, borrower characteristics,
various loan attributes such as loan-to-value and debt-to-income ratios and geographic concentration), credit ratings (original and current), home price
changes and interest rates.
256 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10