Barclays 2003 Annual Report Download - page 118

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Specific provisions are raised when the Group considers that the
creditworthiness of a borrower has deteriorated such that the recovery
of the whole or part of an outstanding advance is in serious doubt.
Typically, this is done on an individual basis, although scope exists within
the retail businesses, where the portfolio comprises homogeneous assets
and where statistical techniques are appropriate, to raise specific
provisions on a portfolio basis.
General provisions are raised to cover losses which are judged to be
present in loans and advances at the balance sheet date, but which have
not been specifically identified as such. These provisions are adjusted
at least half yearly by an appropriate charge or release of general
provision based on a statistical analysis. The accuracy of this analysis is
periodically assessed against actual losses. Gradings are used to rate the
credit quality of borrowers. Each grade corresponds to an Expected
Default Frequency and is calculated by using manual or computer driven
score-sheets validated by an analysis of the Group’s own historical data.
This grade can be derived from different sources depending upon the
borrower (e.g. internal model, credit rating agency). The general
provision also takes into account the economic climate in the market
in which the Group operates and the level of security held in relation
to each category of counterparty. The general provision includes a
specifically identified element to cover country transfer risk calculated
on a basis consistent with the overall general provision calculation.
General provisions are created with respect to the recoverability of assets
arising from off balance sheet exposures in a manner consistent with the
general provisioning methodology.
The aggregate specific and general provisions which are made during
the year, less amounts released and recoveries of bad debts previously
written off, are charged against operating profit and are deducted from
loans and advances. Impaired lendings are written off against the
balance sheet asset and provision in part, or in whole, when the extent
of the loss incurred has been confirmed.
If the collection of interest is doubtful, it is credited to a suspense
account and excluded from interest income in the profit and loss
account. Although it continues to be charged to the customers’
accounts, the suspense account in the balance sheet is netted against
the relevant loan. If the collection of interest is considered to be remote,
interest is no longer applied and suspended interest is written off. Loans
on which interest is suspended are not reclassified as accruing interest
until interest and principal payments are up to date and future payments
are reasonably assured.
Assets acquired in exchange for advances in order to achieve an orderly
realisation continue to be reported as advances. The asset acquired is
recorded at the carrying value of the original advance updated as at the
date of the exchange. Any subsequent impairment is accounted for as
a specific provision.
(m) Debt securities and equity shares
Investment securities are debt securities and equity shares intended
for use on a continuing basis by the Group and identified as such.
Investment securities are stated at cost less any provision for
impairment. The cost of dated investment securities is adjusted for the
amortisation of premiums or discounts on purchase over the period to
redemption. The amortisation of premiums and discounts is included in
interest receivable.
Other debt securities and equity shares are stated at market value and
profits and losses arising from this revaluation are taken directly to the
profit and loss account through dealing profits. Listed securities are
valued based on market prices, with long positions at bid and short
positions at offer price. Unlisted securities are valued based on the
Directors’ estimate, which takes into consideration discounted cash
flows, price earnings ratios and other valuation techniques.
In the case of private equity investments, listed and unlisted investments
are stated at cost less any provision for impairment.
Investment and other securities may be lent or sold subject to a
commitment to repurchase them. Securities lent or sold are retained
on the balance sheet where substantially all the risks and rewards of
ownership remain with the Group. Similarly, securities purchased
subject to a commitment to resell are treated as collateralised lending
transactions where the Group does not acquire the risks and rewards
of ownership.
(n) Pensions and other post-retirement benefits
The Group provides pension plans for employees in most parts of the
world. Arrangements for staff retirement benefits in overseas locations
vary from country to country and are made in accordance with local
regulations and customs. For defined contribution schemes, the pension
cost recognised in the profit and loss account represents the
contributions payable to the scheme. The majority of UK staff are
members of The Barclays Bank UK Retirement Fund (the UK Fund) which
comprises four sections. These are a defined benefit scheme (the 1964
Pension Scheme) and a defined contribution scheme (the Retirement
Investment Scheme), which are both now closed to new members,
a hybrid scheme, afterwork, and a defined contribution scheme, the
Pension Investment Plan. Details are set out in Note 4. Other UK staff
are covered by broadly comparable schemes which are accounted for on
a comparable basis. The assets of the UK Fund are held separately from
the assets of the Group and are administered by a trustee. The pension
cost is assessed in accordance with the advice of a qualified actuary,
using the projected unit method. Variations from the regular cost are
allocated over the expected average service lives of current employees.
Provisions for pensions arise when the profit and loss account charge
exceeds the contribution to the scheme as a result of actuarial
valuations. These provisions will be eliminated over the estimated service
lives of the employees. The basis of estimation is set out in Note 4 on
page 128. The Group also provides post-retirement health care to certain
staff and pensioners in the UK and US. Where appropriate, provisions for
post-retirement benefits are raised on a basis similar to that detailed
for defined benefit pension schemes. Where an actuarial basis is not
appropriate, provisions are recognised in accordance with the policy
on non-credit risk provisions (see (q) below).
(o) Finance leases
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, other than legal title,
are classified as finance leases. Finance lease receivables are included in
loans and advances to customers. Gross earnings under finance leases
are allocated to accounting periods in such a way as to give a constant
periodic rate of return on the net cash investment. Finance lease
receivables are stated at the cost of the equipment, including gross
earnings to date, less rentals received to date.
(p) Deferred tax
Deferred tax is provided in full in respect of timing differences that have
originated but not reversed at the balance sheet date. Timing differences
are differences between the Group’s taxable profits and its results as
stated in the accounts that arise from the inclusion of gains and losses
in tax assessments in periods different from those in which they are
recognised in the financial statements. Deferred tax is not provided on
permanent differences. Deferred tax assets are recognised to the extent
that it is regarded as more likely than not that they will be recoverable.
Consolidated Accounts Barclays PLC
Accounting Policies