Barclays 2005 Annual Report Download - page 277

Barclays PLC
Annual Report 2005 275
3.5
63 Differences between IFRS and US GAAP accounting principles (continued)
(h) Business combination
In 2002, Barclays and Canadian Imperial Bank of Commerce completed the combination of their retail, corporate and offshore banking operations
and created FirstCaribbean International Bank. Under both IFRS and US GAAP, Barclays accounts for the resulting interest as an associate. At the
time of the transaction, a gain of £206m was generated under both UK and US GAAP, the gain being recorded in equity for UK GAAP but in the
income statement under US GAAP (APB 29 and EITF 01-02). The net assets of the business transferred by Barclays to the new entity were not
materially different under US GAAP.
In 2004, an adjustment of £13m was made to the gain of £206m, which was also recorded in the income statement under US GAAP.
(i) Foreign exchange differences on available for sale (AFS) debt securities
Under IFRS the translation of foreign currency denominated AFS debt securities into the functional currency of the legal entity in which they are held
is recognised directly in the income statement. For US GAAP these movements are reported in shareholders’ equity.
The pre-tax credit of £185m (2004: £428m) represents the reclassification of this amount from the income statement into shareholders’ equity
for US GAAP.
(j) Hedging
The US GAAP hedging adjustment results in a decrease in income of £208m. Of this, £69m relates to the reversal of IFRS transition adjustments and
the inclusion of SFAS 133 transition adjustments and £139m relates to ongoing hedging differences.
(k) Consolidation
Under US GAAP, the differences in the consolidation criteria to IFRS results in an increase in total assets of £4,268m (2004: decrease of £3,571m).
Under US GAAP, the Group consolidates entities in which it has a controlling financial interest. This is determined by initially evaluating whether
the entity is a voting interest entity, a variable interest entity (VIE), or a qualifying special purpose entity (QSPE).
Voting interest entities
Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and
provides the equity holders with the obligation to absorb losses, the rights to receive residual returns and the right to make decisions about the
entity’s activities. Voting interest entities are consolidated in accordance with ARB 51 which states that the usual condition for a controlling financial
interest in an entity is ownership of a majority voting interest.
Variable interest entities
As defined in FIN 46-R, an entity is considered a VIE subject to consolidation if the equity investment at risk is not sufficient to permit the entity
to finance its activities without additional subordinated financial support or if the equity investors lack one of three characteristics of a controlling
financial interest described above. First, the equity investors lack the ability to make decisions about the entity’s activities through voting rights or
similar rights. Second, they do not bear the obligation to absorb the expected losses of the entity if they occur. Lastly, they do not claim the right
to receive expected returns of the entity if they occur, which are the compensation for the risk of absorbing the expected losses.
VIEs are consolidated by the interest holder that remains exposed to the majority of the entity’s expected losses or residual returns, that is, the
primary beneficiary.
The business activities within the Barclays Group where VIEs are used include multi-seller conduit programmes, asset securitisations, client
intermediation, credit structuring, asset realisations and fund management.
Multi-seller conduit programmes
Barclays creates, administers and provides liquidity and credit enhancements to several commercial paper conduit programmes, primarily in the
United States. These conduits provide clients access to liquidity in the commercial paper markets by allowing them to sell consumer or trade
receivables to the conduit, which then issues commercial paper to investors to fund the purchase. The conduits have sufficient collateral, credit
enhancements and liquidity support to maintain an investment grade rating for the commercial paper.
Asset securitisations
The Group assists companies with the formation of asset securitisations. These entities have minimal equity and rely upon funding in the form
of notes to purchase the assets for securitisation. The Group provides both senior and/or junior lending and derivative contracts to the entities,
where junior notes are provided and in certain circumstances where derivative contracts are provided, the Group may be the primary beneficiary
of the entity.