Barclays 2003 Annual Report Download - page 120

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determined either directly by reference to actual cash flows implicit
in observable market prices or through modelling cash flows using
appropriate financial-markets pricing models. The effect of discounting
expected cash flows back to present value is achieved by constructing
discount curves derived from the market price of the most appropriate
observable interest rate products such as deposits, interest rate futures
and swaps. In addition, the Group maintains fair value adjustments
reflecting the cost of credit risk (where this is not embedded in the
fair value), hedging costs not captured in pricing models, future
administration costs associated with ongoing operational support of
products as well as adjustments to reflect the cost of exiting illiquid
or other significant positions.
(s) Collateral and netting
The Group enters into master agreements with counterparties whenever
possible and, when appropriate, obtains collateral. Master agreements
provide that, if an event of default occurs, all outstanding transactions
with the counterparty will fall due and all amounts outstanding will be
settled on a net basis.
Where the amounts owed by both the Group and the counterparty are
determinable and in freely convertible currencies, and where the Group
has the ability to insist on net settlement which is assured beyond doubt,
and is based on a legal right under the netting agreement that would
survive the insolvency of the counterparty, transactions with positive fair
values are netted against transactions with negative fair values.
The Group obtains collateral in respect of customer liabilities where this
is considered appropriate. The collateral normally takes the form of a
lien over the customer’s assets and gives the Group a claim on these
assets for both existing and future liabilities.
The Group also receives collateral in the form of cash or securities in
respect of other credit instruments, such as stock borrowing contracts,
and derivative contracts in order to reduce credit risk. Collateral received
in the form of securities is not recorded on the balance sheet. Collateral
received in the form of cash is recorded on the balance sheet with a
corresponding liability or asset. These items are assigned to deposits
received from bank or other counterparties in the case of cash collateral
received, and to loans and advances to banks or customers in the case of
cash collateral paid away. Any interest payable or receivable arising is
recorded as interest payable or interest income respectively.
(t) Credit related instruments
The Group treats credit related instruments (other than credit
derivatives) as contingent liabilities and these are not shown on the
balance sheet unless, and until, the Group is called upon to make a
payment under the instrument. Assets arising from payments to a third
party where the Group is awaiting reimbursement from the customer,
are shown on the balance sheet where reimbursement is considered to
be virtually certain. Fees received for providing these instruments are
taken to profit over the life of the instrument and reflected in fees and
commissions receivable.
(u) Sale and repurchase agreements (including stock borrowing
and lending)
The Group enters into sale and repurchase agreements, including stock
lending arrangements (repos), and purchase and resale agreements,
including stock borrowing arrangements (reverse repos). Under a
repo (sale and repurchase agreement) an asset is sold (or lent) to a
counterparty with a commitment to repurchase (or return) the assets at
a future date at an agreed price. A reverse repo is the same transaction
from the opposite viewpoint. The cash legs of these transactions are
included within loans and advances to banks, loans and advances to
customers, deposits by banks and customer accounts. The Group aims to
earn net interest income and dealing profits from these activities, as well
as funding its own holdings of securities. The difference between sale
and repurchase and purchase and resale prices for such transactions,
including dividends received where appropriate, is charged or credited
to the profit and loss account over the life of the relevant transactions.
(v) Securitisation transactions
Certain Group undertakings have issued debt securities or have entered
into funding arrangements with lenders in order to finance specific loans
and advances to customers. In accordance with FRS 5, these balances are
either accounted for on the basis of linked presentation or through
separate recognition of the gross assets and related funding.
(w) Capital instruments
Debt securities in issue and similar securities are stated at the net issue
proceeds adjusted for amortisation of premiums, discounts and expenses
related to their issue where the liability is a fixed amount. Where the
liability fluctuates, based on, for example, the performance of an index
then the debt security reflects the current value of the liability.
Loan capital in issue is stated at the net issue proceeds adjusted for
amortisation of premiums, discounts and expenses related to their issue.
Amortisation is calculated in order to achieve a constant yield across the
life of the instrument.
(x) Internally developed software
The Group’s general policy is to write-off such expenditure as incurred
except where the software is required to facilitate the use of new
hardware. Capitalised amounts are recorded as tangible fixed assets.
Changes in accounting policy
Following the issue of UITF Abstract 37, ‘Purchases and sales of own
shares’, Group holdings of Barclays PLC shares (excluding shares held
in Employee Share Ownership Plan (ESOP) trusts) are accounted for
as a deduction in arriving at shareholders’ funds, rather than as assets.
Purchases and sales of Barclays PLC shares are shown as changes in
shareholders’ funds. No profits or losses are recognised in respect of
dealings in Barclays PLC. Comparatives have been restated accordingly.
As a result, equity shares and shareholders’ funds have been reduced by
£4m at 31st December 2002, and £12m at 31st December 2003. There
was no impact on the 2002 or 2003 profit and loss account.
There have been no other significant changes to the accounting policies
as described in the 2002 Annual Report.
Future UK accounting developments
The Group is currently considering the implications of UITF Abstract 38,
‘Accounting for ESOP trusts’, which was issued in December 2003.
UITF Abstract 38 requires shares held in ESOP trusts to be accounted for
as a deduction in arriving at shareholders’ funds, rather than as assets.
The charge to the profit and loss account in respect of such shares
is based on the intrinsic value of the shares, rather than book value.
UITF Abstract 38 will be implemented by the Group in 2004.
Conversion to International Financial Reporting Standards in 2005
By Regulation, the EU has agreed that virtually all listed companies must
use International Financial Reporting Standards (IFRS) adopted for use
in the EU in the preparation of their 2005 consolidated accounts.
Barclays will have to comply with this Regulation. The objective is to
improve financial reporting and enhance transparency to assist the free
flow of capital throughout the EU and to improve the efficiency of the
capital markets.
Although existing UK requirements are similar in many ways to IFRSs,
there are key differences. The final text for many of the standards was
Consolidated Accounts Barclays PLC
Accounting Policies