Barclays 2005 Annual Report Download - page 262

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
UK GAAP IFRS
(r) Loan impairment
Specific provisions are raised when the creditworthiness of a borrower
has deteriorated such that the recovery of the whole or part of an
outstanding advance is in serious doubt. Specific provisions are
generally raised on an individual basis, although specific provisions
may be raised on a portfolio basis for homogeneous assets and where
statistical techniques are appropriate. 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.
If collection of interest is doubtful, it is credited to a suspense account
and excluded from interest income in the profit and loss account.
The suspense account in the balance sheet is netted against the
relevant loan.
(s) Effective interest
Interest is recognised in the income statement as it accrues. Fee income
relating to loans and advances is recognised so as to match the cost of
providing a continuing service, together with a reasonable profit margin.
Where fees are charged in lieu of interest, it is recognised as interest
receivable on a level yield basis over the life of the advance. Costs
associated with the acquisition of financial assets are either spread over
the anticipated life of the loans or recognised as incurred, depending on
the nature of the cost.
(t) Insurance contracts
Certain products offered to institutional pension funds are accounted
for as investment products when the substance of the investment is
that of managed funds. The assets and related liabilities are excluded
from the consolidated balance sheet in order to reflect this substance.
Barclays PLC
Annual Report 2005
260
Notes to the accounts
For the year ended 31st December 2005
Impairment losses are recognised where there is evidence of
impairment as a result of one or more loss events that have occurred
after initial recognition, and where these events have had an impact on
the estimated future cash flows of the financial asset or portfolio of
financial assets. Impairment of loans and receivables is measured as the
difference between the carrying amount and the present value of
estimated future cash flows discounted at the financial asset’s original
effective interest rate. Impairment is measured individually for assets
that are individually significant and on a collective basis for portfolios
with similar risk characteristics.
Under IFRS, all impairment allowances are calculated in the same
manner and there is no distinction between general and specific
provisions.
The overall change in the total level of credit impairment is not material.
The application of IFRS has resulted in reanalysis of UK GAAP general
and specific provisions into IFRS impairment allowances and the
reallocation of impairment allowances within the businesses.
Interest on impaired loans is recognised using the original effective
interest rate, being the rate used to discount the estimated future cash
flows for the purpose of calculating impairment.
The effective interest method is a method of calculating the amortised
cost of a financial asset or liability (or group of assets and liabilities) and
of allocating the interest income or interest expense over the relevant
period. The effective interest rate is the rate that exactly discounts the
expected future cash payments or receipts through the expected life of
the financial instrument, or when appropriate, a shorter period, to the
net carrying amount of the instrument. The method results in all fees
relating to the origination or settlement of the loan that are in the
nature of interest and all direct and incremental costs associated with
origination being recognised over the expected life of the loan. The
application of the method has the effect of recognising income (or
expense) receivable (or payable) on an instrument evenly in proportion
to the amount outstanding over the period to maturity or repayment.
From 1st January 2005, life assurance products are divided into
investment contracts and insurance contracts. Investment contracts are
accounted for under IAS 39 and insurance contracts are accounted for
under the Modified Statutory Solvency Basis. The income and expense
and assets and liabilities that arise on the investment contracts are
presented separately from those arising under insurance contracts.
Where the legal form of the asset management products offered to
institutional pension funds is an insurance contract, the assets and
corresponding liabilities associated with these products are recorded
on the balance sheet as investment contracts.