Barclays 2011 Annual Report Download - page 227

20 Fair value of financial instruments
Accounting for financial assets and liabilities – fair values
The Group applies IAS 39. All financial instruments are initially recognised at fair value on the date of initial recognition and, depending on the
classification of the asset, may continue to be held at fair value either through profit or loss or other comprehensive income.
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, in an arm’s length transaction
between knowledgeable willing parties.
Wherever possible, fair value is determined by reference to a quoted market price for that instrument. For many of the Group’s financial assets and
liabilities, especially derivatives, quoted prices are not available, and valuation models are used to estimate fair value. The models 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.
On initial recognition, it is presumed that the transaction price is the fair value unless there is observable information available in an active market to
the contrary.
For valuations that have made use of significant unobservable inputs, the difference between the model valuation and the initial transaction price
(‘Day One profit’) is recognised in profit or loss either:
– on a straight-line basis over the term of the transaction, or over the period until all model inputs will become observable where appropriate; or
– released in full when previously unobservable inputs become observable.
Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include 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.
The sensitivity of valuations used in the financial statements to reasonably possible changes in variables is shown on page 236.
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