Barclays 2003 Annual Report Download - page 108

Off Balance Sheet Arrangements
In the ordinary course of business and primarily to facilitate client
transactions, the Group enters into off balance sheet arrangements with
unconsolidated entities. These arrangements include the provision of
guarantees on behalf of the Group’s customers, retained interests in
assets which have been transferred to an unconsolidated entity and
obligations arising out of variable interests in an unconsolidated entity.
Guarantees
In the normal course of business, the Group issues guarantees on behalf
of its customers. In the majority of cases, Barclays will hold collateral
against the exposure, have a right of recourse to the customer or both.
In addition, Barclays issues guarantees on its own behalf.
The main types of guarantees provided are financial guarantees given to
banks and financial institutions on behalf of customers to secure loans,
overdrafts and other banking facilities, including stock borrowing
indemnities and standby letters of credit. Other guarantees provided
include performance guarantees, advance payment guarantees, tender
guarantees, guarantees to Customs and Excise and retention guarantees.
Further details on these guarantees are provided in Note 61 on page 200.
Special purpose entities
The off balance sheet arrangements entered into by the Group typically
involve the use of special purpose entities (SPEs).
These are entities that are set up for a specific purpose and generally
would not enter into an operating activity nor have any employees.
The most common form of SPE involves the acquisition of financial
assets that are funded by the issuance of securities to external investors,
which have cash flows different from those of the underlying
instruments. The repayment of these securities is determined by the
performance of the assets acquired by the SPE. These entities form an
integral part of many financial markets, and are important to the
development of the European securitisation market and functioning
of the US commercial paper market.
The consolidation approach to the SPEs is different under UK and
US GAAP.
UK GAAP treatment
Under UK GAAP the financial statements are required to present a true
and fair view, which includes reflecting the substance of the transactions
and arrangements and not just the legal form.
Accordingly, the substance of any transaction with an SPE forms the
basis for the treatment in the Group’s financial statements. When a
Group company has transferred assets into an SPE, these assets should
only be derecognised when the criteria within Financial Reporting
Standard (FRS) 5 (Reporting the substance of transactions) are fully met.
An SPE is consolidated by the Group either if it meets the criteria of
FRS 2 (Accounting for subsidiaries), or if the risk and rewards associated
with the SPE reside with the Group, such that the substance of the
relationship is that of a subsidiary. Financial data relating to entities
consolidated on this latter basis is given in Note 58 on page 170.
US GAAP treatment
Under US GAAP, the Group determines whether it has a controlling
financial interest in an entity by initially evaluating whether the entity
is a voting interest entity, a variable interest entity (VIE), or a qualifying
special purpose entity (QSPE).
Voting interest entities are entities in which the total equity investment
at risk is sufficient to enable each entity to finance itself independently
and provides the equity holders with the obligation to absorb losses, the
rights to receive residual returns and the right to make decisions about
the entity’s activities. Voting interest entities are consolidated in
accordance with ARB 51. ARB 51 states that the usual condition for
a controlling financial interest in an entity is ownership of a majority
voting interest.
As defined in FIN 46 (Consolidation of Variable Interest Entities), VIEs are
entities which lack one or more of the characteristics of a voting interest
entity described above. FIN 46 states that a controlling financial interest
in an entity is present where an enterprise has a variable interest, or a
combination of variable interests, that will absorb the majority of the
entity’s expected losses, receive a majority of the entity’s expected
residual returns, or both. The enterprise with a controlling financial
interest is the primary beneficiary under FIN 46. Accordingly, the Group
consolidates all VIEs in which it is the primary beneficiary subject to the
transitional requirements of FIN 46, as described in Note 61.
In accordance with SFAS 140 (Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities), the Group does not
consolidate QSPEs. QSPEs are passive entities that hold financial assets
transferred to them by the Group and are commonly used in mortgage
and other securitisation transactions.
Prior to the adoption of FIN 46, the Group consolidated all non-qualifying
SPEs if the Group controlled the SPE and held a majority of the SPE’s
substantive risks and rewards.
The Group, in the ordinary course of business, and primarily to facilitate
client transactions, has helped establish SPEs in various areas which are
described below, along with their UK and US GAAP treatment:
Commercial paper conduits
The Group provides its clients with access to liquidity through the use of
asset backed commercial paper programmes. These programmes involve
the sale of financial assets by clients to entities which are, in effect,
commercial paper conduits that then issue commercial paper to fund
the purchases. The financial assets held by the conduits, which totalled
£12,650m (2002: £16,090m) at 31st December 2003, normally take the
form of consumer or trade receivables. Of the above amount, assets held
by the conduits which have been originated by the Group amounted to
£192m (2002: £318m) and have been reported on the Group’s balance
sheet under UK GAAP. The remainder represents client assets in which
the Group has no interest and which are not reported on the Group’s
balance sheet at 31st December 2003. Certain administrative activities
and the provision of liquidity and credit facilities to the programmes are
performed by the Group under arm’s-length contracts that it, or the
conduit’s independent board of directors, can terminate. Net fees
received by the Group for performing these services amounted to £58m
(2002: £40m). Under the US GAAP rules prior to the adoption of FIN 46,
certain of these conduits are consolidated by the Group. This has
minimal impact on net income, although assets increase by £2,845m
(2002: £2,767m). The commitments to provide liquidity to these vehicles
are a maximum of £12,650m, which would be required to be provided in
the event of the conduits’ access to funding markets being restricted.
Further details of these transactions are provided in Note 61 on
pages 196 and 197.
Financial Review
Off Balance Sheet Arrangements
106