Barclays 2011 Annual Report Download - page 222

Notes to the financial statements
For the year ended 31 December 2011 continued
16 Financial assets designated at fair value continued
Credit risk of loans and advances designated at fair value and related credit derivatives
The following table shows the maximum exposure to credit risk, the changes in fair value attributable to changes in credit risk and the cumulative
changes in fair value since initial recognition together with the amount by which related credit derivatives mitigate this risk:
Maximum exposure as at
31 December
Changes in fair value during
the year ended
Cumulative changes in fair
value from inception
2011 2010 2011 2010 2011 2010
Loans and advances designated at fair value, attributable to credit risk 21,960 22,352 (75) 326 (5,070) (4,995)
Fair value of related credit derivatives 1,198 2,206 138 (481) 401 263
17 Derivative financial instruments
Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. They
include swaps, forward rate agreements, futures, options and combinations of these instruments and primarily affect the Group’s net interest income,
net trading income, net fee and commission income and derivative assets and liabilities. Notional amounts of the contracts are not recorded on the
balance sheet. The Group’s objectives and policies on managing the risks that arise in connection with derivatives, including the policies for hedging, are
discussed in the Risk Management section on pages 67 to 158. Trading derivatives are managed within the Group’s market risk management policies,
which are outlined on pages 121 to 129.
The Group’s exposure to credit risk arising from derivative contracts, as well as the Group’s participation in exchange traded and over the counter
derivatives markets are outlined in the Credit Risk section on page 107.
Accounting for derivatives
The Group applies IAS 39. All derivative instruments are held at fair value through profit or loss, except for derivatives held for risk management
purposes in an effective hedge relationship (see hedge accounting below). This includes terms included in a contract or other financial asset or
liability (the host), which, had it been a standalone contract, would have had met the definition of a derivative. These are separated from the host
and accounted for in the same way as a derivative.
Hedge accounting
The Group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of
its interest and currency risk management strategies. 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. Where derivatives are held for
risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the Group applies fair
value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation, as appropriate to the risks being
hedged.
Fair value hedge accounting
Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The fair value changes adjust the carrying value of
the hedged asset or liability held at amortised cost.
If hedge relationships no longer meet the criteria for hedge accounting, hedge accounting is discontinued. For fair value hedges of interest rate risk,
the fair value adjustment to the hedged item is amortised to the income statement over the period to maturity of the previously designated hedge
relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised
immediately in the income statement.
Cash flow hedge accounting
For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in other
comprehensive income, and then recycled to the income statement in the periods when the hedged item will affect profit or loss. Any ineffective
portion of the gain or loss on the hedging instrument is recognised in the income statement immediately.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity and is recognised when the hedged item is ultimately recognised in the income statement. When a
forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the
income statement.
Hedges of net investments
The Group’s net investments in foreign operations, including monetary items accounted for as part of the net investment, are hedged for foreign
currency risks using both derivatives and foreign currency borrowings. Hedges of net investments are accounted for similarly to cash flow hedges;
the effective portion of the gain or loss on the hedging instrument is being recognised directly in other comprehensive income and the ineffective
portion being recognised immediately in the income statement. The cumulative gain or loss recognised in other comprehensive income is
recognised in the income statement on the disposal or partial disposal of the foreign operation, or other reductions in the Group’s investment in the
operation.
220 Barclays PLC Annual Report 2011 www.barclays.com/annualreport