Barclays 2004 Annual Report Download - page 128

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Consolidated accounts Barclays PLC
Accounting policies
The Group selects its depreciation rates carefully and reviews them
regularly to take account of any changes in circumstances. When
setting useful economic lives, the principal factors the Group takes
into account are the expected rate of technological developments,
expected market requirements for the equipment and the intensity
at which the assets are expected to be used.
No depreciation is provided on freehold land.
(k) Impairment
Tangible fixed assets and goodwill are subject to impairment review
in accordance with FRS 11 if there are events or changes in
circumstances that indicate that the carrying amount of the fixed
asset or goodwill may not be fully recoverable. The impairment review
comprises a comparison of the carrying amount of the fixed asset or
goodwill with its recoverable amount, which is the higher of net
realisable value and value in use. Net realisable value is calculated by
reference to the amount at which the asset could be disposed of.
Value in use is calculated by discounting the expected future cash
flows obtainable as a result of the asset’s continued use, including those
resulting from its ultimate disposal, at a market based discount rate on a
pre-tax basis. The carrying values of fixed assets and goodwill are written
down by the amount of any impairment and this loss is recognised in the
profit and loss account in the period in which it occurs. If the occurrence
of an external event gives rise to a reversal of an impairment loss, the
reversal is recognised in the profit and loss account and by increasing the
carrying amount of the fixed asset or goodwill in the period in which it
occurs. The carrying amount of the fixed asset or goodwill will only be
increased up to the amount that it would have been had the original
impairment not occurred. For the purpose of conducting impairment
reviews, income generating units are identified as groups of assets,
liabilities and associated goodwill that generate income that is largely
independent of other income streams. The assets and liabilities include
those directly involved in generating the income and an appropriate
proportion of those used to generate more than one income stream.
(l) Loans and Advances
Loans and advances, other than those held in a dealing portfolio, are
recorded in the balance sheet at cost, less interest in suspense debited
to the customer’s account, specific and general provisions. Advances
held in a dealing portfolio for the purpose of trading on a secondary
market are valued at the lower of cost and market value. Market values
are based on independent price quotations.
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. For
larger accounts, this is done on an individual basis, by taking into account
relevant considerations that have a bearing on expected cashflows,
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