Barclays 2005 Annual Report Download - page 138

Consolidated accounts Barclays PLC
Accounting policies
The effective interest method is a method of calculating the amortised
cost of a financial asset or liability (or group of assets and liabilities)
and of allocating the interest income or interest expense over the
relevant period. The effective interest rate is the rate that exactly
discounts the expected future cash payments or receipts through the
expected life of the financial instrument, or when appropriate, a shorter
period, to the net carrying amount of the instrument. The application
of the method has the effect of recognising income (and expense)
receivable (or payable) on the instrument evenly in proportion to the
amount outstanding over the period to maturity or repayment.
In calculating effective interest, the Group estimates cash flows
(using projections based on its experience of customers’ behaviour)
considering all contractual terms of the financial instrument but
excluding future credit losses. Fees, including those for early
redemption, are included in the calculation to the extent that they can
be measured and are considered to be an integral part of the effective
interest rate. Cash flows arising from the direct and incremental costs
of issuing financial instruments are also taken into account in the
calculation. Where it is not possible to otherwise estimate reliably
the cash flows or the expected life of a financial instrument, effective
interest is calculated by reference to the payments or receipts specified
in the contract, and the full contractual term.
Fees and commissions
Unless included in the effective interest calculation, fees and
commissions are recognised on an accruals basis as the service is
provided. Fees and commissions not integral to effective interest
arising from negotiating, or participating in the negotiation of a
transaction from a third party, such as the acquisition of loans,
shares or other securities or the purchase or sale of businesses, are
recognised on completion of the underlying transaction. Portfolio and
other management advisory and service fees are recognised based on
the applicable service contracts. Asset management fees related to
investment funds are recognised over the period the service is
provided. The same principle is applied to the recognition of income
from wealth management, financial planning and custody services that
are continuously provided over an extended period of time.
Commitment fees, together with related direct costs, for loan facilities
where draw-down is probable are deferred and recognised as an
adjustment to the effective interest on the loan once drawn.
Commitment fees in relation to facilities where draw-down is not
probable are recognised over the term of the commitment.
Prior to 1st January 2005
Interest income is recognised in the income statement as it accrues,
with the exception of interest on non-performing loans as set out in
accounting policy 11.
Fee income relating to loans and advances is recognised in the
income statement to match the cost of providing a continuing service,
together with a reasonable profit margin. Where a fee is charged in
lieu of interest, it is recognised in the income statement as interest
receivable on a level yield basis over the life of the advance. Fees and
commissions receivable in respect of all other services provided are
recognised in the income statement when the related services are
performed and when considered recoverable.
Mortgage indemnity premiums
From 1st January 2005
Mortgage indemnity premiums received are included in the effective
interest rate on the associated loan.
Prior to 1st January 2005
Premiums are deferred and included in accruals and deferred income
in the Group balance sheet. Following regular reviews of the amount
of income required to cover anticipated losses in respect of this
lending, deferred income is released to the income statement on an
annual basis.
Insurance premiums
Insurance premiums are recognised in the period earned.
Net trading income
Income arises from the margins which are achieved through market-
making and customer business and from changes in market value
caused by movements in interest and exchange rates, equity prices and
other market variables. Trading positions are held at fair value and the
resulting gains and losses are included in the Income statement,
together with interest and dividends arising from long and short
positions and funding costs relating to trading activities.
Lending related fees and commissions payable and incentives
From 1st January 2005
Fees and commissions payable to introducers in respect of obtaining
lending business, where these are direct and incremental costs related
to the issue of a financial instrument, are included in interest income as
part of the effective interest rate.
Prior to 1st January 2005
Fees and commissions payable to introducers in respect of obtaining
certain lending business, where this is the primary form of distribution,
are charged to the income statement as fees and commissions
payable, over the anticipated life of the loans.
The costs of mortgage incentives, which comprise cashbacks and
interest discounts, are charged to the income statement as a reduction
to interest receivable as incurred.
Dividends from subsidiaries
In the individual financial statements of Barclays PLC, dividends from
subsidiaries are accounted for on the basis of dividends received in the
accounting period.
10. Financial assets and liabilities
From 1st January 2005
Financial assets
The Group classifies its financial assets in the following categories:
financial instruments designated at fair value through profit or loss;
loans and receivables; held to maturity investments and available for
sale financial assets. Management determines the classification of
financial assets and liabilities at initial recognition.
Financial instruments at fair value through profit or loss
Financial instruments are classified in this category if they are held for
trading, or if they are designated by management under the fair value
option. Instruments are classified as held for trading if they are:
(i) acquired principally for the purposes of selling or repurchasing in
the near term;
(ii) part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent
actual pattern of short-term profit-taking; or
(iii) a derivative, except for a derivative that is a financial guarantee
contract or a designated and effective hedging instrument.
Barclays PLC
Annual Report 2005
136