Barclays 2004 Annual Report Download - page 127

Barclays PLC Annual Report 2004
125
For the purpose of calculating goodwill, fair values of acquired assets
and liabilities are determined by reference to market values, where
available, or by reference to the current price at which similar assets
could be acquired or similar obligations entered into, or by discounting
expected future cash flows to present value. This discounting is either
performed using market rates or by using risk-free rates and risk-
adjusted expected future cash flows.
(f) Foreign currencies
Assets and liabilities in foreign currencies are translated into sterling at
rates of exchange ruling on the balance sheet date. Overseas profits and
losses are translated into sterling at average rates of exchange for the
year. Profits arising in areas experiencing hyperinflation are adjusted
to recognise its effect on the worth of the working capital employed.
Exchange differences arising from the application of closing rates
of exchange to the opening net assets held overseas, the retranslation
of the result for the year from the average rate to the closing rate and
to related foreign currency borrowings are taken directly to reserves.
All other exchange profits and losses, which arise from normal trading
activities, are included in the profit and loss account.
(g) Shareholders’ interest in the retail long-term assurance fund
The value of the shareholders’ interest in the Group’s retail long-term
assurance business represents an estimate of the net present value of
the 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 assumptions for 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) on page 126.
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. Deferred income is released to the profit and loss
account over the average life of the loan.
(j) Tangible fixed assets
Tangible fixed assets are carried at original cost or, for certain
properties, at subsequent valuation, less related depreciation,
calculated on the revalued amount where appropriate. Following
the introduction of FRS 15 in 2000, the revalued book amounts are
retained without subsequent revaluation, subject to the requirement
to test for impairment.
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 ten years, costs of
adaptation and installed equipment are depreciated over the remaining life
of the lease.