Barclays 2004 Annual Report Download - page 220

218
Notes to the accounts
For the year ended 31st December 2004
52 Differences between UK GAAP and US GAAP accounting principles (continued)
(q) Securitisations (continued)
The transfer of receivables is accounted for as a sale under US GAAP where control of the receivables has been relinquished. A gain or loss is
recognised on securitisation of the receivables which is calculated based on the previous carrying amount of the loans involved in the transfer
(allocated between the receivables sold and the seller’s interest based on their relative fair values at the date of sale).
The Group estimates the fair value of the retained interests by determining the present value of future expected cash flows using valuation
models that incorporate management’s best estimates of key assumptions, which include:
(a) the expected prepayment rate of the receivables each year;
(b) the anticipated credit losses from the receivables; and
(c) a discount rate to calculate future income flows.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded
at fair value with subsequent adjustments reflected in net income.
The servicing liability represents the shortfall of future servicing income from the Group’s obligation to service the transferred assets compared
to the costs of servicing those assets. The servicing liability is amortised over the expected life of the receivables.
Securitisation activity during the year
During 2004, the Group securitised credit card receivables with a book value of £810m (2003: £2,508m) recognising a resultant pre-tax gain on
sale of £38m (2003: £132m). The Group has recognised an interest only strip asset and a servicing liability in connection with the transfer.
The derecognition of the securitised assets results in a reduction in net loans and advances to customers of £3,270m (2003: £2,447m).
Mortgage Loans Securitisation
In 2004, Barclays acquired and then securitised ten static pools of residential mortgage loans which were originated by unaffiliated mortgage
companies. All of the securitisations were affected through the sale of mortgage loans to Qualifying Special Purpose Vehicles (‘QSPEs’).
To fund the acquisition of these mortgage loans, the trust issued FRNs. The FRNs were underwritten by Barclays and sold to third party investors.
The offering circulars for the issues of FRN’s stated that they are the obligations of the respective trust only and are not guaranteed by, or the
responsibility of, any other party. A call right is held by the originator with the right to liquidate the trust if the principal balance of the mortgage
shares has fallen below 10% of their initial amount, provided all obligations under the bonds can be satisfied in full.
Securitisation activity during the year
Non-returnable proceeds of these securitisations totalled £4,538m at issue. In 2004, Barclays recognised a net gain of £25m arising from the
transfer of these assets to the QSPEs.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded at
fair value with subsequent adjustments reflected in net income.
Interest only strip
The movement in fair value of retained interests during the period is as follows:
2004 2003 2004 2003
Mortgage Mortgage Credit card Credit card
loans loans receivables receivables
£m £m £m £m
Value at 1st January ––97 –
Value at inception of new securitisations 270 –30 107
Transfer to net income ––(10) (10)
Cash flow from interests retained (90) –––
Foreign exchange differences (9) –––
Value at 31st December 171 –117 97
Key economic assumptions used in measuring the interest only strip at the time of the securitisation were as follows:
2004 2003 2004 2003
Mortgage Mortgage Credit card Credit card
loans loans receivables receivables
Fair value of interest only strip at inception of new securitisations £270m –£30m £107m
Constant prepayment rate per annum 15%-17% –100% 100%
Credit losses per annum(a) 2%-4.25% –5.5% 5.3%
Discount rate 15%-25% –5.0% 5.0%
Note
(a) Annual percentage credit loss is based only on positions in which expected credit loss is a key assumption in the determination of fair values.