Barclays 2005 Annual Report Download - page 279

Barclays PLC
Annual Report 2005 277
3.5
63 Differences between IFRS and US GAAP accounting principles (continued)
(l) Securitisations
Credit card securitisations
The Group transfers portfolios of credit card receivable assets to Gracechurch Receivables Trustee Limited. Barclaycard Funding PLC, a subsidiary
of Barclays Bank, has an equitable interest in the cash flows arising from the securitised assets and has issued Loan Note Certificates to the
Gracechurch Card Funding vehicles which are Qualifying Special Purpose Entities (‘QSPEs’). QSPEs sell the Medium Term Notes to investors entitling
them to receive specified cash flows during the life of the security. The proceeds of the issuance of Medium Term Notes are then distributed by the
QSPEs to the Group as consideration for the Loan Note Certificates transferred. Following a securitisation, the Group receives fees for servicing the
receivables and providing cash management services and payment of deferred consideration for the sale of the beneficial interest in the excess
income over and above the interest paid to the noteholder. The Group maintains an interest in the pool of receivables that are available for
securitisation, referred to as the seller’s interest.
Investors have no recourse against the Group if cash flows generated from the securitised assets are not sufficient to service the obligations of
the QSPEs.
The Group has no right or obligation to repurchase the benefit of any securitised balance, except if certain representations and warranties given by
the Group at the time of transfer are breached.
The Group has entered into interest rate currency swaps with the QSPEs. These swaps convert a proportion of the Sterling variable interest flows
arising from the Loan Note Certificates to US Dollar variable and fixed rate interest flows to match the interest payable on the Medium Term
Notes issued.
The transfer of receivables is accounted for as a sale under US GAAP where control of the receivables has been relinquished. A gain or loss is
recognised on securitisation of the receivables which is calculated based on the previous carrying amount of the loans involved in the transfer
(allocated between the receivables sold and the seller’s interest based on their relative fair values at the date of sale).
The Group estimates the fair value of the retained interests by determining the present value of future expected cash flows using valuation models
that incorporate management’s best estimates of key assumptions, which include:
(a) the expected prepayment rate of the receivables each year;
(b) the anticipated credit losses from the receivables; and
(c) a discount rate to calculate future income flows.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded
at fair value with subsequent adjustments reflected in net income.
The servicing liability represents the shortfall of future servicing income from the Group’s obligation to service the transferred assets compared
to the costs of servicing those assets. The servicing liability is amortised over the expected life of the receivables.
Securitisation activity during the year
During 2005, the Group securitised credit card receivables with a book value of £3,497m (2004: £810m) recognising a resultant pre-tax gain
on sale under US GAAP of £174m (2004: £38m). The Group has recognised an interest only strip asset and a servicing liability in connection
with the transfer.
The derecognition of the securitised assets results in a reduction in net loans and advances to customers of £6,648m (2004: £3,270m).
Mortgage Loans Securitisation
In 2004, Barclays acquired and then securitised ten static pools of residential mortgage loans which were originated by unaffiliated mortgage
companies. Certain of these securitisations were affected through the sale of mortgage loans to QSPEs. During 2005, Barclays acquired and then
securitised an additional ten pools of residential mortgage loans; however, these securitisations did not qualify for sale accounting and are treated
as financing transactions.
To fund the acquisition of these mortgage loans, the trust issued Floating Rate Notes (FRNs). The FRNs were underwritten by Barclays and sold to
third party investors. The offering circulars for the issues of FRN’s stated that they are the obligations of the respective trust only and are not
guaranteed by, or the responsibility of, any other party. A call right is held by the originator with the right to liquidate the trust if the principal balance
of the mortgage shares has fallen below 10% of their initial amount, provided all obligations under the bonds can be satisfied in full.
Securitisation activity during the year
During 2005, no securitisations qualified for sale accounting, and therefore non-returnable proceeds of these securitisations totalled £nil at issue
(2004: £4,538m) and a net gain of £nil arising from the transfer of these assets to the QSPEs (2004: £25m) was recognised.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded at fair
value with subsequent adjustments reflected in net income.