Barclays 2005 Annual Report Download - page 140

Consolidated accounts Barclays PLC
Accounting policies
income statement through dealing profits. Listed securities are valued
based on market prices, with long positions at bid and short positions
at offer price. Unlisted securities are valued, based on the Directors’
estimate, which takes into consideration discounted cash flows, price
earnings ratios and other valuation techniques.
In the case of private equity investments, listed and unlisted
investments are stated at cost less any provision for impairment.
11. Impairment of financial assets
From 1st January 2005
The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset or a portfolio of financial
assets carried at amortised cost is impaired. A financial asset or
portfolio of financial assets is impaired and impairment losses are
incurred if, and only if, there is objective evidence of impairment as
a result of one or more loss events that occurred after the initial
recognition of the asset and prior to the balance sheet date (‘a loss
event’) and that loss event or events has had an impact on the
estimated future cash flows of the financial asset or the portfolio that
can be reliably estimated. Objective evidence that a financial asset or
a portfolio is impaired includes observable data that comes to the
attention of the Group about the following loss events:
(a) significant financial difficulty of the issuer or obligor;
(b) a breach of contract, such as a default or delinquency in interest
or principal payments;
(c) the lender, for economic or legal reasons relating to the
borrower’s financial difficulty, granting to the borrower a
concession that the lender would not otherwise consider;
(d) it becomes probable that the borrower will enter bankruptcy or
other financial reorganisation;
(e) the disappearance of an active market for that financial asset
because of financial difficulties; or
(f) observable data indicating that there is a measurable decrease in
the estimated future cash flows from a portfolio of financial assets
since the initial recognition of those assets, although the decrease
cannot yet be identified with the individual financial assets in the
portfolio, including:
(i) adverse changes in the payment status of borrowers in the
portfolio;
(ii) national or local economic conditions that correlate with
defaults on the assets in the portfolio.
The Group first assesses whether objective evidence of impairment
exists individually for financial assets that are individually significant,
and individually or collectively for financial assets that are not
individually significant. If the Group determines that no objective
evidence of impairment exists for an individually assessed financial
asset, whether significant or not, it includes the asset in a group of
financial assets with similar credit risk characteristics and collectively
assesses them for impairment. Assets that are individually assessed for
impairment and for which an impairment loss is or continues to be
recognised are not included in a collective assessment of impairment.
For loans and receivables and assets held to maturity, the amount of
impairment loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. The amount of
the loss is recognised using an allowance account and recognised in
the income statement.
The calculation of the present value of the estimated future cash flows
of a collateralised financial asset reflect the cash flows that may result
from foreclosure costs for obtaining and selling the collateral, whether
or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, financial
assets are grouped on the basis of similar risk characteristics, taking
into account asset type, industry, geographical location, collateral type,
past-due status and other relevant factors. These characteristics are
relevant to the estimation of future cash flows for groups of such
assets by being indicative of the counterparty’s ability to pay all
amounts due according to the contractual terms of the assets
being evaluated.
Future cash flows in a group of financial assets that are collectively
evaluated for impairment are estimated on the basis of the contractual
cash flows of the assets in the group and historical loss experience for
assets with credit risk characteristics similar to those in the group.
Historical loss experience is adjusted based on current observable data
to reflect the effects of current conditions that did not affect the period
on which the historical loss experience is based and to remove the
effects of conditions in the historical period that do not currently exist.
The methodology and assumptions used for estimating future cash
flows are reviewed regularly to reduce any differences between loss
estimates and actual loss experience.
Following impairment, interest income is recognised using the original
effective rate of interest which was used to discount the future cash
flows for the purpose of measuring the impairment loss.
When a loan is uncollectable, it is written off against the related
provision for loan impairment. Such loans are written off after all the
necessary procedures have been completed and the amount of the loss
has been determined. Subsequent recoveries of amounts previously
written off decrease the amount of the provision for loan impairment
in the income statement.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed by adjusting the allowance
account. The amount of the reversal is recognised in the income
statement.
Equity securities acquired in exchange for loans and advances in order
to achieve an orderly realisation are accounted for as a disposal of the
loan and an acquisition of equity securities. Where control is obtained
over an entity as a result of the transaction, the entity is consolidated.
Any further impairment of the assets or business acquired is treated as
an impairment of the relevant asset or business and not as an
impairment of the original instrument.
In the case of equity instruments classified as available for sale, a
significant or prolonged decline in the fair value of the security below
its cost is considered in determining whether impairment exists. Where
such evidence exists, the cumulative net loss that has been previously
recognised directly in equity is removed from equity and recognised in
the income statement. In the case of debt instruments classified as
available for sale, impairment is assessed based on the same criteria as
all other financial assets. Reversals of impairment of debt securities are
recognised in the income statement. Reversals of impairment of equity
Barclays PLC
Annual Report 2005
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