Barclays 2005 Annual Report Download - page 260

62 First-time adoption of International Financial Reporting Standards (IFRS) (continued)
Differences between UK GAAP and IFRS
Effects of the application of IAS 32, IAS 39 and IFRS 4
The significant differences between the Group’s UK GAAP accounting policies and IFRS accounting policies applied to the treatment of financial
instruments and insurance contracts, which have been incorporated into the opening balance sheet as at 1st January 2005, are as follows:
UK GAAP IFRS
(n) Derivatives and hedge accounting
Derivatives used for hedging purposes are measured on an accruals
basis consistent with the assets, liabilities, positions or future cash flows
being hedged. The gains and losses on these instruments (arising from
changes in fair value) are not recognised in the profit and loss account
immediately as they arise. Such gains are either not recognised in the
balance sheet or are recognised and carried forward. When the hedged
transaction occurs, the gain or loss is recognised in the profit and loss
account at the same time as the hedged item.
Derivatives that are not hedge accounted are recorded at fair value, with
changes in fair value recorded in the profit and loss account.
Products which contain embedded derivatives are valued with reference
to the total product inclusive of the derivative element.
(o) Classification and measurement of financial instruments
Financial instruments are generally divided into banking book, which are
carried at cost, and trading book, which are carried at fair value.
Positions in investment debt securities and investments in equity shares
are stated at cost less provision for diminution in value. Investment
securities are those intended for use on a continuing basis by the Group.
Barclays PLC
Annual Report 2005
258
Notes to the accounts
For the year ended 31st December 2005
IAS 39 requires all derivatives to be recorded at fair value. Provided all
hedge accounting conditions are met and the hedging relationship is
deemed to be effective, the derivative may be designated as a fair value
hedge, cash flow hedge or hedge of a net investment in a foreign
operation. The change in value of the fair value hedge is recorded in
income along with the change in fair value, relating to the hedged risk,
of the hedged asset or liability. The change in value of a cash flow
hedge is recorded in equity, to the extent it is effective and recycled
to income as the hedged cash flows affect the income statement.
The change in value of a net investment hedge is recorded in the
translation reserve to the extent the hedge is effective and only released
to the income statement when the underlying investment is sold.
As at 1st January 2005, all hedging derivatives have been recognised at
fair value and adjustments have been made to hedged items where fair
value hedge accounting will be applied. Hedges have been designated
and documented in compliance with IFRS and, where possible, US
GAAP with hedge accounting applied from that date. Where hedges
were in place under UK GAAP that have not been designated as hedges
under IFRS, adjustments have been made to the hedged item or equity
to reflect the hedged position as at 31st December 2004.
Some hybrid contracts contain both a derivative and a non-derivative
component. In such cases, the derivative component is termed an
embedded derivative. Where the economic characteristics and risks of
the embedded derivative are not closely related to those of the host
contract, and the host contract itself is not carried at fair value, the
embedded derivative is bifurcated and reported at fair value with gains
and losses being recognised in the income statement.
At 1st January 2005, all embedded derivatives or the whole contracts
containing embedded derivatives have been included on the balance
sheet at fair value.
IAS 39 requires all financial assets to be classified at initial acquisition
and subsequently measured in accordance with the classification:
Classification Measurement basis
Held to maturity Amortised cost less impairment
Loan or receivable Amortised cost less impairment
Available for sale Fair value – gains and losses included in
shareholders’ equity until disposal
or impairment
Fair value through Fair value – gains and losses included in the
profit or loss income statement
Financial liabilities are classified as held for trading or are carried at
amortised cost.
In addition, in certain circumstances financial assets and liabilities may
be designated as fair valued through profit and loss at initial acquisition.