Barclays 2014 Annual Report Download - page 278

276 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Notes to the financial statements
Assets and liabilities held at fair value
15 Derivative financial instruments
Accounting for derivatives
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 applies IAS 39. All derivative instruments are held at fair value through profit or loss. Derivatives are classified as assets when their
fair value is positive or as liabilities when their fair value is negative. This includes terms included in a contract or other financial asset or liability
(the host), which, had it been a stand-alone 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.
Total derivatives
2014 2013
Notional
contract
amount
£m
Fair value Notional
contract
amount
£m
Fair value
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Total derivative assets/(liabilities) held for trading 32,624,342 438,270 (438,623) 41,983,266 347,555 (345,845)
Total derivative assets/(liabilities) held for risk management 268,448 1,639 (697) 303,645 2,745 (1,273)
Derivative assets/(liabilities) 32,892,790 439,909 (439,320) 42,286,911 350,300 (347,118)
The fair value of gross derivative assets increased by 26% to £440bn driven by increase in interest rate derivatives of £78bn reflecting reduction
in the major interest rate forward curves and an increase in foreign exchange derivatives of £14bn due to strengthening of the USD against major
currencies. Information on further netting of derivative financial instruments is included within Note 19 Offsetting financial assets and financial
liabilities.