Barclays 2004 Annual Report Download - page 132

Although many of the uncertainties concerning whether and how the
standards will be adopted for use in the EU have been resolved, some
questions remain, particularly regarding the endorsement of amendments
to standards and to interpretations issued in the second half of 2004.
In addition, how IFRS financial statements will be interpreted for tax and
regulatory capital purposes remains subject to some uncertainty, with the
regulatory capital requirements not expected to be finalised before April
2005 and the tax treatment of the first time adoption adjustments not
determined until later. However, the programme is following normal
project controls and change management and the Group is on track to
meet all requirements for financial reporting in 2005.
Barclays held briefings and issued a presentation in December 2004 that
set out the main impacts of the conversion to IFRS and explained the
policy choices that the Group had made.
The main impacts of the standards, as described in the briefings, are:
•Hedge accounting (IAS 39) – as permitted by the EU, the hedge
accounting requirements of IAS 39 will be applied in full. Both cash
flow hedge accounting and micro fair value hedge accounting will
be used resulting in all hedging derivatives being carried at fair
value, equity volatility with respect to cash flow hedge accounting
and any hedge ineffectiveness being reflected immediately in
income.
•Classification of instruments (IAS 39) – UK GAAP requires the
separate classification of financial assets between banking book
and trading book. Under IFRS, financial assets will be classified as:
held to maturity; loans and receivables (carried at amortised cost
less impairment); held for trading and fair valued through income;
or available for sale and fair valued through equity. Financial
liabilities held for trading will be fair valued through income.
The fair value option is not currently available for other financial
liabilities under EU law.
•Balance sheet gross up (IAS 32/39/27) – the IFRS netting rules
coupled with the consolidation requirements will result in
significant grossing up of the balance sheet, including certain
conduit vehicles and funds under management being included
on balance sheet, no linked presentation for securitisations and line
by line consolidation of insurance subsidiaries.
•Funding instruments (IAS 32) – Reserve Capital Instruments
and other Upper Tier 2 instruments that contain no obligation
to pay coupon or interest will be reclassified from debt to equity.
•Goodwill (IFRS 3) – rather than being subject to systematic annual
amortisation, goodwill arising on consolidation will be tested for
impairment each year. Future acquisitions will give rise to more
intangible assets that are subject to amortisation and potentially
less goodwill.
•Effective interest rate (IAS 39) – rather than interest-related fees
and costs being recognised as earned or incurred, all interest and
interest-related fees and costs will be recognised at a constant rate
over the expected life of the related financial instruments. Such
fees and costs will also be included in net interest rather than in
fees and commissions.
•Loan impairment (IAS 39) – provisions will be raised where there
is objective evidence of impairment and determined based on the
expected cash flows discounted at the loan’s original effective
interest rate. Opening impairment stock is expected to be broadly
in line with UK GAAP provisions stock.
•Share-based payments (IFRS 2) – an annual charge for share
options and other share-based payments will be determined based
on the fair value of options granted spread over the vesting period.
•Pensions (IAS 19) – the initial pension surpluses or deficits will be
recognised in the opening balance sheet resulting in a significant
reduction in shareholders’ funds compared with the previous UK
GAAP approach which relied on the actuarial funding valuations.
•Dividends (IAS 10) – rather than being accrued as a liability when
declared, dividends will be recognised when paid.
•Life fund (IFRS 4/IAS 39) – although IFRS permits embedded value
accounting to be used for insurance contracts, all embedded value
will be reversed on adoption of IFRS, whether it relates to
investment products or insurance products, resulting in a reduction
in shareholders’ funds.
•Software capitalisation (IAS 38) – internally generated computer
software will be recognised on balance sheet and amortised over its
useful economic life.
•Guarantees (IAS 39) – issued guarantees will be recognised initially
on balance sheet at fair value resulting in a small reduction in
shareholders’ funds.
•Leasing (IAS 17) – the income recognition profile for finance leases
is different under IFRS with revenue typically being recognised later.
•De-recognition of liabilities (IAS 39) – liabilities can only be
removed from the balance sheet when they are legally
extinguished.
The restated 2004 IFRS results, excluding the impact of IAS 32 and IAS
39 on financial instruments and IFRS 4 on insurance contracts, and the
opening 2005 IFRS balance sheet, including these standards, will be
issued in the second quarter of 2005. The first results on a full IFRS
basis will be provided for the June 2005 half year.
Consolidated accounts Barclays PLC
Accounting policies
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