Barclays 2005 Annual Report Download - page 139

Barclays PLC
Annual Report 2005 137
3.5
Financial instruments cannot be transferred into or out of this category
after inception. Financial instruments included in this category are
recognised initially at fair value and transaction costs are taken directly
to the Income statement. Gains and losses arising from changes in fair
value are included directly in the Income statement. The instruments
are derecognised when the rights to receive cash flows have expired
or the Group has transferred substantially all the risks and rewards of
ownership and the transfer qualifies for derecognition.
Regular way purchases and sales of financial instruments held for
trading or designated under the fair value option are recognised on
trade date, being the date on which the Group commits to purchase
or sell the asset.
The fair value option is used in the following circumstances:
(i) financial assets backing insurance contracts and financial assets
backing investment contracts are designated at fair value through
profit or loss because the related liabilities have cash flows that
are contractually based on the performance of the assets or the
related liabilities are insurance contracts whose measurement
incorporates current information. Fair valuing the assets through
profit and loss significantly reduces the recognition
inconsistencies that would arise if the financial assets were
classified as available for sale;
(ii) financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss if they contain substantive embedded
derivatives;
(iii) financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss where doing so significantly reduces
measurement inconsistencies that would arise if the related
derivatives were treated as held for trading and the underlying
financial instruments were carried at amortised cost; and
(iv) Certain private equity and other investments that are managed,
and evaluated on a fair value basis in accordance with a
documented risk management or investment strategy and
reported to key management personnel on that basis are
designated at fair value through profit and loss.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and
which are not classified as available for sale. Loans and receivables
are initially recognised at fair value including direct and incremental
transaction costs. They are subsequently valued at amortised cost,
using the effective interest method (see accounting policy 9 on page
135). They are derecognised when the rights to receive cash flows
have expired or the Group has transferred substantially all the risks and
rewards of ownership.
Regular way purchases and sales of loans and receivables are
recognised on contractual settlement.
Held to maturity
Held to maturity investments are non-derivative financial assets with
fixed or determinable payments that the Group’s management has the
intention and ability to hold to maturity. They are initially recognised at
fair value including direct and incremental transaction costs. They are
subsequently valued at amortised cost, using the effective interest
method (see accounting policy 9 on page 135). They are derecognised
when the rights to receive cash flows have expired or the Group has
transferred substantially all the risks and rewards of ownership.
Regular way purchases and sales of held to maturity financial assets
are recognised on contractual settlement.
Available for sale
Available for sale assets are non-derivative financial assets that are
designated as available for sale and are not categorised into any of the
other categories described above. They are initially recognised at fair
value including direct and incremental transaction costs. They are
subsequently held at fair value. Gains and losses arising from changes
in fair value are included as a separate component of equity until sale
when the cumulative gain or loss is transferred to the income
statement. Interest determined using the effective interest method
(see accounting policy 9 on page 135), impairment losses and
translation differences on monetary items are recognised in the income
statement. The assets are derecognised when the rights to receive cash
flows have expired or the Group has transferred substantially all the
risks and rewards of ownership.
Regular way purchases and sales of available for sale financial
instruments are recognised on trade date, being the date on which
the Group commits to purchase or sell the asset.
Financial liabilities
Financial liabilities are measured at amortised cost, except for trading
liabilities and liabilities designated at fair value, which are held at fair
value through profit or loss. Financial liabilities are derecognised when
they are extinguished.
Determining fair value
Where the classification of a financial instrument requires it to be
stated at fair value, this is determined by reference to the quoted bid
price or asking price (as appropriate) in an active market wherever
possible. Where no such active market exists for the particular asset,
the Group uses a valuation technique to arrive at the fair value,
including the use of prices obtained in recent arms-length transactions,
discounted cash flow analysis, option pricing models and other
valuation techniques commonly used by market participants.
Profits or losses are only recognised on initial recognition when such
profits can be measured solely by reference-observable current market
transactions or valuation techniques based solely on observable
market inputs.
Prior to 1st January 2005, financial assets were accounted for as follows:
Loans and advances
Loans and advances, other than those held in a dealing portfolio, are
recorded in the balance sheet at cost, less interest in suspense debited
to the customer’s account, specific and general provisions. Advances
held in a dealing portfolio for the purpose of trading on a secondary
market are valued at the lower of cost and market value.
Investment securities
Investment securities are debt securities and equity shares intended
for use on a continuing basis by the Group and identified as such.
Investment securities are stated at cost less any provision for
impairment. The cost of dated investment securities is adjusted for the
amortisation of premiums or discounts on purchase over the period to
redemption. The amortisation of premiums and discounts is included
in interest receivable.
Other debt securities and equity shares are stated at market value and
profits and losses arising from this revaluation are taken directly to the