Barclays 2005 Annual Report Download - page 227

57 Fair value of financial instruments
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, in an arms-length transaction
between knowledgeable willing parties.
The following table summarises the carrying amounts of financial assets and financial liabilities presented on the Group’s balance sheet, and their
fair values:
2005
Carrying Fair
amount value
Notes £m £m
Financial assets:
Cash and balances at central banks (a) 3,906 3,906
Items in the course of collection from other banks (a) 1,901 1,901
Trading portfolio assets (b) 155,723 155,723
Financial assets designated at fair value:
– held on own account (b) 12,904 12,904
– held in respect of linked liabilities to customers under investment contracts (b) 83,193 83,193
Derivative financial instruments (b) 136,823 136,823
Loans and advances to banks (c) 31,105 31,094
Loans and advances to customers (c) 268,896 268,786
Available for sale financial investments (b) 53,497 53,497
Reverse repurchase agreements and cash collateral on securities borrowed (c) 160,398 160,398
Financial liabilities:
Deposits from banks (d) 75,127 75,145
Items in the course of collection due to other banks (d) 2,341 2,341
Customer accounts (d) 238,684 238,608
Trading portfolio liabilities (b) 71,564 71,564
Financial liabilities designated at fair value: held on own account (b) 33,385 33,385
Liabilities to customers under investment contracts (g) 85,201 85,201
Derivative financial instruments (b) 137,971 137,971
Debt securities in issue (e) 103,328 103,294
Repurchase agreements and cash collateral on securities lent (d) 121,178 121,178
Subordinated liabilities (f) 12,463 13,610
Notes
(a) Fair value approximates carrying value due to the minimal credit losses and short-term nature of the financial assets and liabilities.
(b) Financial instruments at fair value (including those held for trading, designated at fair value, derivatives and available for sale) are either priced
with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using a valuation
model, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back
to a present value. The expected cash flows for each contract are determined either directly by reference to actual cash flows implicit in
observable market prices or through modelling cash flows using appropriate financial-markets pricing models. Wherever possible these models
use as their basis observable market prices and rates including, for example, interest rate yield curves, equities and commodities prices, option
volatilities and currency rates.
The process of calculating fair value on illiquid instruments or from a valuation model may require estimation of certain pricing parameters,
assumptions or model characteristics. These estimates are calibrated against industry standards, economic models and observed transaction
prices. Changes to assumptions or estimated levels can potentially impact the fair value of an instrument as reported. The effect of changing
these assumptions, for those financial instruments for which the fair values were measured using valuation techniques that are determined in
full or in part on assumptions that are not supported by observable market prices, to a range of reasonably possible alternative assumptions,
would be to increase the fair value by up to £121m or to decrease the fair value by up to £87m. The decrease in fair value was arrived at by
imposing more conservative assumptions in the estimation of valuation model inputs. The increase in fair value was arrived at by taking less
conservative assumptions in the estimation of valuation model inputs and less conservative assumptions over the uncertainty of valuation
models. These variations in the assumptions have been estimated on a product by product basis and form part of the Bank’s internal control
processes over the determination of fair value.
The valuation model used for a particular instrument, the quality and liquidity of market data used for pricing, other fair value adjustments not
specifically captured by the model, market data and assumptions or estimates in these are all subject to internal review and approval
procedures and consistent application between accounting periods.
Barclays PLC
Annual Report 2005 225
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