Barclays 2003 Annual Report Download - page 117

Barclays PLC Annual Report 2003 115
profits inherent in the in-force policies, based on the advice of qualified
actuaries, together with the surplus retained within the long-term
assurance funds. This value is calculated after tax. Changes in the value
placed on the long-term assurance business attributable to shareholders
are included in the profit and loss account.
For the purpose of presentation, the change in value is grossed up at the
effective rate of corporation tax.
In estimating the net present value of the profits inherent in the in-force
policies, the calculations use assumed economic parameters (future
investment returns, expense inflation and risk discount rate), taxation,
mortality, persistency, expenses and the required levels of regulatory
and solvency capital. Each of these assumptions is reviewed annually.
The returns on fixed interest investments are set to market yields at the
period end. The returns on UK and overseas equities and property are
set to fixed interest returns plus a margin to reflect the additional return
expected on each of these investments. The calculations are based on
the market value of assets at the period end. The expense inflation
assumption is based on long-term expectations of both earnings and
retail price inflation. The risk discount rate is set to market yields on
Government securities plus a margin to allow for the risks borne. The
mortality, persistency and expense assumptions are chosen to represent
best estimates of future experience and are based on current business
experience. No credit is taken for favourable changes in experience
unless it is reasonably certain to be delivered. The projected tax charges
and the required levels of regulatory and solvency capital are based on
current legislation.
(h) Revenue recognition
Interest income is recognised in the profit and loss account as it accrues,
with the exception of interest on non-performing loans as set out in
accounting policy (l) below.
Fee income relating to loans and advances is recognised in the profit
and loss account to match the cost of providing a continuing service,
together with a reasonable profit margin. Where a fee is charged in lieu
of interest, it is recognised in the profit and loss account as interest
receivable on a level yield basis over the life of the advance. Fees and
commissions receivable in respect of all other services provided are
recognised in the profit and loss account when the related services are
performed and when considered recoverable.
Income arises from the margins which are achieved through market-
making and customer business and from changes in market value caused
by movements in interest and exchange rates, equity prices and other
market variables. Trading positions are valued on a mark to market basis.
The resulting income is included in dealing profits along with interest
and dividends arising from long and short positions and funding costs
relating to trading activities.
(i) Lending related fees and commissions payable and incentives
Fees and commissions payable to introducers in respect of obtaining
certain lending business, where this is the primary form of distribution,
are charged to the profit and loss account as fees and commissions
payable, over the anticipated life of the loans.
The costs of mortgage incentives, which comprise cashbacks and
interest discounts, are charged to the profit and loss account as a
reduction to interest receivable as incurred.
The amount of a fee payable by a borrower representing an insurance
premium, in respect of high loan to value UK residential secured loans
is deferred and included in accruals and deferred income in the Group
balance sheet. Following regular reviews of the amount of deferred
income required to cover anticipated losses in respect of this lending,
deferred income is released to the profit and loss account on an
annual basis.
(j) Depreciation
Tangible fixed assets are depreciated on a straight-line basis over their
useful economic lives at the following annual rates:
Freehold buildings and long-leasehold property
(more than 50 years to run) 2%
Leasehold property over the remaining
(less than 50 years to run) life of the lease
Costs of adaptation of freehold and
leasehold property(a) 10%
Equipment installed in freehold and
leasehold property(a) 10%
Computers and similar equipment 20%-33%
Fixtures and fittings and other equipment 20%
Note
(a) Where a leasehold has a remaining useful life of less than 10 years, costs of
adaptation and installed equipment are depreciated over the remaining life
of the lease.
The Group selects its depreciation rates carefully and reviews them
regularly to take account of any changes in circumstances. When setting
useful economic lives, the principal factors the Group takes into account
are the expected rate of technological developments, expected market
requirements for the equipment and the intensity at which the assets
are expected to be used.
No depreciation is provided on freehold land.
(k) Impairment
Tangible fixed assets and goodwill are subject to impairment review in
accordance with FRS 11 if there are events or changes in circumstances
that indicate that the carrying amount of the fixed asset or goodwill may
not be fully recoverable. The impairment review comprises a comparison
of the carrying amount of the fixed asset or goodwill with its recoverable
amount, which is the higher of net realisable value and value in use. Net
realisable value is calculated by reference to the amount at which the
asset could be disposed of. Value in use is calculated by discounting the
expected future cash flows obtainable as a result of the assets continued
use, including those resulting from its ultimate disposal, at a market
based discount rate on a pre-tax basis. The carrying values of fixed
assets and goodwill are written down by the amount of any impairment
and this loss is recognised in the profit and loss account in the period in
which it occurs. If the occurrence of an external event gives rise to a
reversal of an impairment loss, the reversal is recognised in the profit
and loss account and by increasing the carrying amount of the fixed
asset or goodwill in the period in which it occurs. The carrying amount
of the fixed asset or goodwill will only be increased up to the amount
that it would have been had the original impairment not occurred. For
the purpose of conducting impairment reviews, income generating units
are identified as groups of assets, liabilities and associated goodwill that
generate income that is largely independent of other income streams.
The assets and liabilities include those directly involved in generating the
income and an appropriate proportion of those used to generate more
than one income stream.
(l) Loans and advances
Loans and advances, other than those held in a dealing portfolio, are
recorded in the balance sheet at cost, less interest in suspense debited
to the customer’s account, specific and general provisions. Advances
held in a dealing portfolio for the purpose of trading on a secondary
market are valued at the lower of cost and market value.