Barclays 2004 Annual Report Download - page 201

Barclays PLC Annual Report 2004
199
52 Differences between UK GAAP and US GAAP accounting principles (continued)
UK GAAP
Derivatives
Derivatives used for hedging purposes are measured on an accruals
basis consistent with the assets, liabilities, positions or future cash
flows being hedged. The gains and losses on these instruments (arising
from changes in fair value) are not recognised in the profit and loss
account immediately as they arise. Such gains are either not
recognised in the balance sheet or are recognised and carried forward.
When the hedged transaction occurs, the gain or loss is recognised in
the profit and loss account at the same time as the hedged item.
Derivatives entered into as trading transactions, together with any
associated hedging, are measured at fair value, and the resultant
profits and losses are included in dealing profits.
Products which contain embedded derivatives are valued with
reference to the total product inclusive of the derivative element.
Fair value of securities
Positions in investment debt securities and investment equity shares
are stated at cost less any provision for impairment. The cost of dated
investment securities is adjusted for the amortisation of premiums
or discount on purchase over the period to redemption. Investment
securities are those intended for use on a continuing basis by
the Group.
Foreign exchange on investment debt securities
Movements resulting from changes in foreign currency exchange rates
are reflected in the profit and loss account.
Loan origination
Fee income relating to the origination of loans is recognised in the
profit and loss account to match the cost over the period in which
the service is provided, together with a reasonable profit margin.
The cost of mortgage incentives, which comprise cashbacks and
interest discounts, are charged to the profit and loss account as
areduction to interest receivable as incurred.
US GAAP
SFAS 133 requires all derivatives to be recorded at fair value as
adjusted by the requirements of EITF 02-03. If certain conditions are
met then the derivative may be designated as a fair value hedge, cash
flow hedge or hedge of the foreign currency exposure of a net
investment in a foreign subsidiary. The change in value of the fair
value hedge is recorded in income along with the change in fair value
of the hedged asset or liability. The change in value of a cash flow
hedge is recorded in other comprehensive income and reclassified to
income as the hedged cash flows affect earnings. The change in the
value of a net investment hedge is recorded in the currency translation
reserve and only released to income when the underlying investment
is sold. With a limited number of exceptions, Barclays has chosen not
to update the documentation of derivative hedges to comply fully with
the requirements of SFAS 133.
Certain terms and conditions of hybrid contracts which themselves
would be standalone derivatives are bifurcated from the underlying
hybrid contract and fair valued if they are not clearly and closely
related to the contract in which they are contained. These are referred
to as embedded derivatives.
Under SFAS 115, debt and marketable equity securities are classified
as one of three types. Trading securities are carried at fair value with
changes in fair value taken through profit and loss; held to maturity
debt securities are carried at amortised cost where there is the ability
and intent to hold to maturity; available for sale securities that are
held for continuing use in the business are carried at fair value with
movements in fair value recorded in shareholders’ equity. Declines
in fair value below cost that are deemed other-than-temporary
impairment are recognised on the held to maturity and available
for sale categories and are reflected in the profit and loss account.
Non-marketable securities held by investment companies are carried
at fair value with movements in fair value recorded in net income.
Under EITF 96-15, as amended by SFAS 133, the change in value of
available for sale debt securities as a result of changes in foreign
currency exchange rates is reflected in shareholders’ equity.
SFAS 91 requires loan origination fees and incremental direct costs of
loan origination to be deferred and amortised over the life of the loan
as an adjustment to interest income.