Barclays 2005 Annual Report Download - page 141

Barclays PLC
Annual Report 2005 139
3.5
shares are not recognised in the income statement. Increases in the fair
value of equity shares after impairment are recognised directly in equity.
Prior to 1st January 2005
Specific provisions are raised when the Group considers that the
creditworthiness of a borrower has deteriorated such that the recovery
of the whole or part of an outstanding advance is in serious doubt.
Typically, this is done on an individual basis, although scope exists
within the retail businesses, where the portfolio comprises
homogeneous assets and where statistical techniques are appropriate,
to raise specific provisions on a portfolio basis.
General provisions are raised to cover losses which are judged to be
present in loans and advances at the balance sheet date, but which
have not been specifically identified as such. These provisions are
adjusted at least half yearly by an appropriate charge or release of
general provision based on a statistical analysis. The accuracy of this
analysis is periodically assessed against actual losses. Gradings are
used to rate the credit quality of borrowers. Each grade corresponds
to an Expected Default Frequency and is calculated by using manual
or computer driven score-sheets validated by an analysis of the Group’s
own historical data. This grade can be derived from different sources
depending upon the borrower (e.g. internal model, credit rating
agency). The general provision also takes into account the economic
climate in the market in which the Group operates and the level of
security held in relation to each category of counterparty. The general
provision includes a specifically identified element to cover country
transfer risk calculated on a basis consistent with the overall general
provision calculation. General provisions are created with respect to
the recoverability of assets arising from off-balance sheet exposures
in a manner consistent with the general provisioning methodology.
The aggregate specific and general provisions which are made during
the year, less amounts released and recoveries of bad debts previously
written off, are charged against operating profit and are deducted from
loans and advances. Impaired lendings are written off against the
balance sheet asset and provision in part, or in whole, when the extent
of the loss incurred has been confirmed.
If the collection of interest is doubtful, it is credited to a suspense
account and excluded from interest income in the income statement.
Although it continues to be charged to the customers’ accounts, the
suspense account in the balance sheet is netted against the relevant
loan. If the collection of interest is considered to be remote, interest
is no longer applied and suspended interest is written off. Loans on
which interest is suspended are not reclassified as accruing interest
until interest and principal payments are up to date and future
payments are reasonably assured.
Assets acquired in exchange for advances in order to achieve an
orderly realisation continue to be reported as advances. The asset
acquired is recorded at the carrying value of the original advance
updated as at the date of the exchange. Any subsequent impairment
is accounted for as a specific provision.
12. Sale and repurchase agreements (including stock borrowing
and lending)
From 1st January 2005
Investment and other securities may be lent or sold subject to a
commitment to repurchase them (a ‘repo’). Such securities are retained
on the balance sheet when substantially all the risks and rewards of
ownership remain with the Group, and the counterparty liability is
included separately on the balance sheet as appropriate.
Similarly, where the Group borrows or purchases securities subject to a
commitment to resell them (a ‘reverse repo’) but does not acquire the risks
and rewards of ownership, the transactions are treated as collateralised
loans, and the securities are not included in the balance sheet.
The difference between sale and repurchase price is accrued over the
life of the agreements using the effective interest method. Securities
lent to counterparties are also retained in the financial statements.
Securities borrowed are not recognised in the financial statements,
unless these are sold to third parties, at which point the obligation to
repurchase the securities is recorded as a trading liability at fair value
and any subsequent gain or loss included in net trading income.
Prior to 1st January 2005
The cash legs of repos and reverse repos are included within loans and
advances to banks, loans and advances to customers, deposits by banks
and customer accounts. The Group aims to earn net interest income
and net trading income from these activities, as well as funding its own
holdings of securities. The difference between sale and repurchase and
purchase and resale prices for such transactions, including dividends
received where appropriate, is charged or credited to the income
statement over the life of the relevant transactions.
13. Securitisation transactions
Certain Group undertakings have issued debt securities or have entered
into funding arrangements with lenders in order to finance specific
loans and advances to customers.
From 1st January 2005
All financial assets continue to be held on the Group balance sheet, and
a liability recognised for the proceeds of the funding transaction, unless:
(i) substantially all the risks and rewards associated with the financial
instruments have been transferred, in which case, the assets are
derecognised in full; or
(ii) if a significant portion, but not all, of the risks and rewards have
been transferred, the asset is derecognised entirely if the
transferee has the ability to sell the financial asset, otherwise the
asset continues to be recognised only to the extent of the Group’s
continuing involvement.
Where (i) or (ii) above applies to a fully proportionate share of all or
specifically identified cash flows, the relevant accounting treatment is
applied to that proportion of the asset.
Transactions undertaken prior to 1st January 2004 that were
accounted for on the basis of linked presentation under UK GAAP have
been represented by separate recognition of the gross assets and the
related funding in 2004.
14. Collateral and netting
The Group enters into master agreements with counterparties
whenever possible and, when appropriate, obtains collateral.
Master agreements provide that, if an event of default occurs, all
outstanding transactions with the counterparty will fall due and all
amounts outstanding will be settled on a net basis.
Collateral
The Group obtains collateral in respect of customer liabilities where
this is considered appropriate. The collateral normally takes the form
of a lien over the customer’s assets and gives the Group a claim on
these assets for both existing and future liabilities.