Barclays 2003 Annual Report Download - page 119

Barclays PLC Annual Report 2003 117
Deferred tax is not provided on the unremitted earnings of subsidiary
undertakings, joint ventures and associated undertakings except to the
extent that dividends have been accrued or a binding agreement to
distribute past earnings in the future has been entered into.
Deferred tax is measured at the average tax rates that are expected
to apply in the periods in which the timing differences are expected
to reverse, based on tax rates and laws that have been enacted or
substantially enacted by the balance sheet date. Deferred tax is
not discounted.
(q) Non-credit risk provisions
Provisions are recognised for present obligations arising as
consequences of past events where it is probable that a transfer of
economic benefit will be necessary to settle the obligation and it can
be reliably estimated.
When a leasehold property ceases to be used in the business, provision
is made where the unavoidable costs of the future obligations relating
to the lease are expected to exceed anticipated income. The provision
is discounted using market rates to reflect the long-term nature of the
cash flows.
When the Group has a detailed formal plan for restructuring a business
and has raised valid expectations in those affected by the restructuring
by starting to implement the plan or announcing its main features,
provision is made for the anticipated cost of the restructuring, including
redundancy costs. The provision raised is normally utilised within
12 months.
Contingent liabilities are possible obligations whose existence will be
confirmed only by uncertain future events or present obligations where
the transfer of economic benefit is uncertain or cannot be reliably
measured. Contingent liabilities are not recognised but are disclosed
unless they are remote.
(r) Derivatives
Derivatives are used to hedge interest, exchange rate commodity and
equity exposures related to non-trading positions. Instruments used
for hedging purposes include swaps, equity derivatives, forward rate
agreements, futures, options and combinations of these instruments.
In addition, the use of derivatives and their sale to customers as risk
management products is an integral part of the Group’s trading
activities. Derivatives entered into for trading purposes include
swaps, equity derivatives, credit derivatives, commodity derivatives,
forward rate agreements, futures, options and combinations of
these instruments.
Derivatives used for asset and liability management purposes
Derivatives used for hedging purposes are measured on an accruals basis
consistent with the assets, liabilities, positions or future cash flows being
hedged. The gains and losses on these instruments (arising from
changes in fair value) are not recognised in the profit and loss account
immediately as they arise. Such gains are either not recognised in the
balance sheet or are recognised and carried forward. When the hedged
transaction occurs, the gain or loss is recognised in the profit and loss
account at the same time as the hedged item.
The criteria required for a derivative instrument to be classified as a
designated hedge are that:
(i) the transaction must be reasonably expected to match or eliminate a
significant proportion of the risk inherent in the assets, liabilities, other
positions or cash flows being hedged and which results from potential
movements in market rates and credit risk; and
(ii) adequate evidence of the intention to hedge and linkage with the
underlying risk inherent in the assets, liabilities, other positions or cash
flows being hedged, must be established at the outset of the transaction.
Designated hedges are reviewed for effectiveness by regular tests
to determine that the hedge is closely negatively correlated to the
designated hedged position in each and every identified time band
in the maturity profile.
Profits and losses on interest rate swaps and options entered into for
hedging purposes are measured on an accrual accounting basis, included
in the related category of income and expense and reported as part of
the yield on the hedged transaction. Amounts paid or received over the
life of futures contracts are deferred until the contract is closed;
accumulated deferred amounts on futures contracts and settlement
amounts paid or received on forward contracts are accounted for as
elements of the carrying value of the associated instrument, affecting
the resulting yield.
A premium paid or received in respect of a credit derivative hedging an
asset or liability is amortised over the life of the protection purchased or
sold against either interest payable or interest receivable. Where a credit
event occurs which triggers a recovery under the credit derivative, then
the recovery will be offset against the profit and loss charge on the
underlying asset or liability.
Foreign exchange contracts which qualify as hedges of foreign currency
exposures, including positions relating to investments the Group makes
outside the UK, are retranslated at the closing rate with any forward
premium or discount recognised over the life of the contract in net
interest income.
Profits and losses related to qualifying hedges, including foreign
exchange contracts, of firm commitments and probable anticipated
transactions are deferred and recognised in income or as adjustments
to carrying amounts when the hedged transactions occur.
Hedging transactions that are superseded or cease to be effective
are measured at fair value. Any profit or loss on these transactions,
together with any profit or loss arising on hedging transactions that
are terminated prior to the end of the life of the asset, are deferred
and amortised into interest income or expense over the remaining life
of the item previously being hedged.
When the underlying asset, liability position or cash flow is terminated
prior to the hedging transaction, or an anticipated transaction is no
longer likely to occur, the hedging transaction is measured on the fair
value accounting basis, as described in the section on derivatives used
for trading purposes below, prior to being transferred to the trading
portfolio. The profit or loss arising from the fair value measurement
prior to the transfer to the trading portfolio is included in the category
of income or expense relating to the previously hedged transaction.
Derivatives used for trading purposes
Derivatives entered into as trading transactions, together with any
associated hedging, are measured at fair value and the resultant profits
and losses are included in dealing profits, along with interest and
dividends arising from long and short positions and funding costs
relating to trading activities. Assets and liabilities resulting from gains
or losses on derivative and foreign exchange contracts are reported
gross in other assets or liabilities, reduced by the effects of qualifying
netting agreements with counterparties.
The fair value of derivatives is determined by calculating the expected
cash flows under the terms of each specific contract, discounted back
to a present value. The expected cash flows for each contract are