Barclays 2003 Annual Report Download - page 200

Notes to the Accounts
For the Year Ended 31st December 2003
198
61 Differences between UK GAAP and US GAAP accounting principles (continued)
(q) Securitisations (continued)
The transfer of receivables is accounted for as a sale under US GAAP where control of the receivables has been relinquished. A gain or loss is
recognised on securitisation of the receivables which is calculated based on the previous carrying amount of the loans involved in the transfer
(allocated between the receivables sold and the seller’s interest based on their relative fair values at the date of sale).
The Group estimates the fair value of the retained interests by determining the present value of future expected cash flows using valuation models
that incorporate management’s best estimates of key assumptions, which include:
(a) the expected prepayment rate of the receivables each year;
(b) the anticipated credit losses from the receivables; and
(c) a discount rate to calculate future income flows.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded at fair
value with subsequent adjustments reflected in net income.
The servicing liability represents the shortfall of future servicing income from the Group’s obligation to service the transferred assets compared to the
costs of servicing those assets. The servicing liability is amortised over the expected life of the receivables.
Securitisation activity during the year
During 2003, the Group securitised credit card receivables with a book value of £2,508m recognising a resultant pre-tax gain on sale of £132m.
The Group has recognised an interest only strip asset and a servicing liability in connection with the transfer.
The derecognition of the securitised assets results in a reduction in net loans and advances to customers of £2,447m.
Interest only strip
The movement in fair value of retained interests during the period is as follows:
Credit card
receivables
£m
Value at inception 107
Transfer to net income (10)
Value at 31st December 2003 97
Key economic assumptions used in measuring the interest only strip at the time of the securitisation during 2003 were as follows:
Year ended
31st December
2003
Credit card
receivables
Fair value of interest only strip £107m
Constant prepayment rate per annum 100%
Credit losses per annum(a) 5.3%
Discount rate 5.0%
Note
(a) Annual percentage credit loss is based only on positions in which expected credit loss is a key assumption in the determination of fair values.