Barclays 2004 Annual Report Download - page 218

216
Notes to the accounts
For the year ended 31st December 2004
52 Differences between UK GAAP and US GAAP accounting principles (continued)
(p) Consolidation
Under US GAAP, the differences in the consolidation criteria to UK GAAP results in an increase in total assets of £9,672m (2003: £5,829m).
Under US GAAP, the Group consolidates entities in which it has a controlling financial interest. This is determined by initially evaluating whether
the entity is a voting interest entity, a variable interest entity (VIE), or a qualifying special purpose entity (QSPE).
Voting interest entities
Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently
and provides the equity holders with the obligation to absorb losses, the rights to receive residual returns and the right to make decisions about
the entity’s activities. Voting interest entities are consolidated in accordance with ARB 51 which states that the usual condition for a controlling
financial interest in an entity is ownership of a majority voting interest.
Variable interest entities
As defined in FIN 46 and FIN 46-R, an entity is considered a VIE subject to consolidation if the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional subordinated financial support or if the equity investors lack one of three characteristics of a
controlling financial interest described above. First, the equity investors lack the ability to make decisions about the entity’s activities through
voting rights or similar rights. Second, they do not bear the obligation to absorb the expected losses of the entity if they occur. Lastly, they do not
claim the right to receive expected returns of the entity if they occur, which are the compensation for the risk of absorbing the expected losses.
VIEs are consolidated by the interest holder that remains exposed to the majority of the entity’s expected losses or residual returns, that is, the
primary beneficiary.
The business activities within the Barclays Group where VIEs are used include multi-seller conduit programmes, asset securitisations, client
intermediation, credit structuring, asset realisations and fund management.
Multi-seller conduit programmes
Barclays creates, administers and provides liquidity and credit enhancements to several commercial paper conduit programmes, primarily in the
United States. These conduits provide clients access to liquidity in the commercial paper markets by allowing them to sell consumer or trade
receivables to the conduit, which then issues commercial paper to investors to fund the purchase. The conduits have sufficient collateral, credit
enhancements and liquidity support to maintain an investment grade rating for the commercial paper.
Asset securitisations
The Group assists companies with the formation of asset securitisations. These entities have minimal equity and rely upon funding in the form of
notes to purchase the assets for securitisation. The Group provides both senior and/or junior lending and derivative contracts to the entities,
where junior notes are provided and in certain circumstances where derivative contracts are provided, the Group may be the primary beneficiary
of the entity.
Client intermediation
As a financial intermediary, the Group is involved in structuring transactions to meet investor and client needs. These transactions may involve
entities that fall within the scope of FIN 46-R structured by either Barclays or the client and that are used to modify cash flows of third-party
assets to create investments with specific risk or return profiles, or to assist clients in the efficient management of other risks. These transactions
may include derivative instruments, and often contain contractual clauses to enable Barclays to terminate the transaction under certain
circumstances, for example, if the legal or accounting basis on which the transaction was completed changes. In addition, Barclays invests as a
limited partner in lessor partnerships and as a parent in wholly owned subsidiaries specifically to acquire assets for leasing. In a portion of these
leasing transactions, there may be risk mitigants in place which result in a third-party consolidating the entities as the primary beneficiary.
Credit structuring
The Group structures investments to provide specific risk profiles to investors. This may involve the sale of credit exposures, often by way of credit
derivatives, to an entity which subsequently funds the credit exposures by issuing securities. These securities may initially be held by Barclays
prior to sale outside of the Group.
Asset realisations
The Group establishes SPEs to facilitate the recovery of banking facilities in circumstances where the borrower has suffered financial loss.
Fund management
The Group provides asset management services to a large number of investment entities on an arm’s-length basis and at market terms and prices.
The majority of these entities are investment funds that are owned by a large and diversified number of investors. In addition, there are various
partnerships, funds and open-ended investment companies that are used by a limited number of independent third parties to facilitate their
tailored private debt, debt securities or hedge fund investment strategies.