Barclays 2005 Annual Report Download - page 146

A liability for contractual benefits that are expected to be incurred in
the future is recorded when the premiums are recognised, based on
the expected discounted value of the benefit payments and directly
related administration costs, less the expected discounted value of
the future premiums that would be required to meet the benefits and
other expenses. The calculation of the liability contains assumptions
regarding mortality, maintenance expenses and investment income.
Liabilities under unit-linked life insurance contracts (such as
endowment policies) in addition reflect the value of assets held within
unitised investment pools.
Short-term insurance contracts
Under its payment protection insurance products the Group is
committed to paying benefits to the policyholder rather than forgiving
interest or principal on the occurrence of an insured event, such as
unemployment, sickness, or injury. Property insurance contracts mainly
compensate the policyholders for damage to their property, or for the
value of property lost.
Premiums are recognised as revenue proportionally over the period of
the coverage. Claims and claims handling costs are charged to income
as incurred, based on the estimated liability for compensation owed to
policyholders arising from events that have occurred up to the balance
sheet date, even if they have not yet been reported to the Group,
based on assessments of individual cases reported to the Group and
statistical analyses for the claims incurred not reported.
Deferred acquisition costs (DAC)
Commissions and other costs that are related to securing new
insurance and investment contracts are capitalised and amortised over
the estimated lives of the relevant contracts.
Deferred income liability
Fees that are designed to recover commissions and other costs related
to either securing new insurance and investment contracts or renewing
existing investment contracts are included as a liability and amortised
over the estimated life of the contract.
Value of business acquired
On acquisition of a portfolio of contracts, such as through the
acquisition of a subsidiary, the Group recognises an intangible asset
representing the value of business acquired (‘VOBA’), representing the
future profits embedded in acquired insurance contracts and
investment contracts with a discretionary participation feature. The
asset is amortised over the remaining terms of the acquired contracts.
Liability adequacy test
Liability adequacy tests are performed at each balance sheet date to
ensure the adequacy of contract liabilities net of DAC and VOBA assets.
Current best estimates of future contractual cash flows, claims
handling and administration costs, and investment returns from the
assets backing the liabilities are taken into account in the tests. Where
a deficiency is highlighted by the test, DAC and VOBA assets are
written off first, and insurance liabilities increased when these are
written off in full. Any deficiency is immediately recognised in the
income statement.
Reinsurance
Short- and long-term insurance business is ceded to reinsurers under
contracts to transfer part or all of one or more of the following risks:
mortality, investment and expenses. All such contracts are dealt with as
insurance contracts. The benefits to which the Group is entitled under
its reinsurance contracts are recognised as reinsurance assets. The
Group assesses reinsurance assets at each balance sheet date. If there
Consolidated accounts Barclays PLC
Accounting policies
is objective evidence of impairment, the carrying amount of the
reinsurance asset is reduced accordingly, resulting in a charge to the
income statement.
Prior to 1st January 2005
Prior to 1st January 2005, the Group treated all products taking the
legal form of an insurance contract as insurance contracts.
From 1st January 2004 the Group has chosen to change its accounting
policy in relation to insurance contracts to use Modified Statutory
Solvency Basis rather than an Embedded Value Basis to account for
insurance policies in the UK. This change resulted in insurance
contracts and investment contracts being accounted for on a similar
basis and represents the most appropriate accounting policy in the
circumstances. This change in policy reduced other operating income
by £47m in 2004 and reduced retained earnings by £592m as at
1st January 2004. The impact on earnings per share was immaterial.
23. Leases
Lessor
Assets leased to customers under agreements, which transfer
substantially all the risks and rewards of ownership, with or without
ultimate legal title, are classified as finance leases. When assets are
held subject to a finance lease, the present value of the lease
payments, discounted at the rate of interest implicit in the lease, is
recognised as a receivable. The difference between the total payments
receivable under the lease and the present value of the receivable
is recognised as unearned finance income, which is allocated to
accounting periods under the pre-tax net investment method to
reflect a constant periodic rate of return.
Assets leased to customers under agreements which do not transfer
substantially all the risks and rewards of ownership are classified as
operating leases. The leased assets are included within property, plant
and equipment on the Group’s balance sheet and depreciation is
provided on the depreciable amount of these assets on a systematic
basis over their estimated useful lives. Lease income is recognised
on a straight-line basis over the period of the lease unless another
systematic basis is more appropriate.
Lessee
Operating lease rentals payable are recognised as an expense in the
income statement on a straight-line basis over the lease term unless
another systematic basis is more appropriate.
24. Employee benefits
The Group provides employees worldwide with post-retirement
benefits mainly in the form of pensions. The Group operates a number
of pension schemes which may be funded or unfunded and of a
defined contribution or defined benefit nature. In addition, the Group
contributes, according to local law in the various countries in which it
operates, to governmental and other plans which have the
characteristics of defined contribution plans.
For defined benefit schemes, actuarial valuation of each of the
scheme’s obligations, using the projected unit credit method and the
fair valuation of each of the scheme’s assets, are performed annually,
using the assumptions set out in Note 38. The difference between the
fair value of the plan assets and the present value of the defined
benefit obligation at the balance sheet date, adjusted for any historic
unrecognised actuarial gains or losses and past service cost, is
recognised as a liability in the balance sheet. An asset, arising for
example as a result of past overfunding or the performance of the
plan investments, is recognised to the extent that it does not exceed
Barclays PLC
Annual Report 2005
144