Barclays 2005 Annual Report Download - page 66

Barclays PLC
Annual Report 2005
64
Risk management
Allowances for Impairment
Impairment Allowances
It is Barclays policy to establish, through charges against profit, an
impairment allowance in respect of the incurred loss inherent in the
lending book.
Under IFRS, impairment allowances are recognised where there is
objective 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. If the carrying amount is
less than the discounted cash flows, then no allowance is necessary.
Impairment is measured individually, for assets that are individually
significant, and collectively where a portfolio comprises homogenous
assets and where appropriate statistical techniques are available.
In terms of individual assessment, the trigger point for the impairment
calculation is formal classification of an account as exhibiting serious
financial problems and where any further deterioration is likely to lead
to failure. Two key inputs to the cash flow calculation are the valuation
of all security and collateral and the timing of all asset realisations,
after allowing for all attendant costs. This method applies in the
Corporate portfolios – Business Banking, Barclays Capital and certain
areas within International Retail and Commercial Banking.
For collective assessment, the trigger point for impairment is the
missing of a contractual payment. The impairment calculation is based
on a roll-rate approach, where the percentage of assets that move from
the trigger point to default are derived from statistical probabilities
based on experience. Recovery amounts and contractual interest rates
are calculated using a weighted average for the portfolio. This method
applies to parts of International Retail and Commercial Banking,
Barclaycard and UK Banking and is consistent with Barclays policy of
raising an allowance as soon as impairment is identified.
Impairment allowances, albeit significantly lower in amount than those
reported above, are also raised to cover losses which are judged to be
incurred but not yet reported in customer exposures at the balance
sheet date, and which, therefore, have not been specifically identified.
These impairment allowances are reviewed and adjusted, at least
quarterly by an appropriate charge or release of the stock of impairment
allowances based on a statistical analysis and management judgement.
The incurred but not yet reported calculation is based on the assets
probability of moving from the performing portfolio to being
specifically identified as impaired within the given emergence period
and then on to default within a specified period. This is calculated on
the present value of estimated future cash flows discounted at the
financial asset’s original effective interest rate.
The emergence periods vary across businesses and are based on actual
experience and are reviewed on an annual basis.
This methodology ensures that the Group only captures the loss
incurred at the balance sheet date.
Where appropriate, the accuracy of this analysis is periodically
assessed against actual losses.
Writing off of Assets
When an advance has been identified as impaired and is subject to an
impairment allowance, the stage may be reached whereby it is
concluded that there is no realistic prospect of recovery. Write-off will
occur, therefore, when, and to the extent that, the whole or part of a
debt is considered irrecoverable.
The timing and extent of write-offs may involve a large element of
subjective judgement. Nevertheless, a write-off will often be prompted
by a specific event, such as the inception of insolvency proceedings or
other formal recovery action, which makes it possible to establish that
some or the entire advance is beyond realistic prospect of recovery. In
any event, the position of impaired loans are reviewed at least quarterly
with a view to irrecoverable advances being written off in a prompt and
orderly manner and in compliance with any local regulations.
Treatment of Interest on Impaired Loans
IFRS requires that interest on impaired loans be recognised on the net
asset value (gross asset value less impairment allowance) at the rate
used to discount the expected cash flows (i.e. the original effective
interest rate).
As a result of an increase in impairment charges to the retail portfolios,
and to a lesser extent in the wholesale and corporate portfolios, the
impairment charges for the Group (including Absa) for the full-year
were £1,571m (2004: £1,093m).
The chart below shows impairment allowance charges over the
last five years.
(See also Table 20 on page 88.)
1,149
1,484 1,347
1,571
1,093
1,800
1,500
1,200
0
300
600
900
Impairment/provisions charges over five years £m
2005
2001 2002 2004(a) 2003
UK GAAP IFRS
UK GAAP IFRS
Impairment charges/provisions charge for bad and
doubtful debts £m
1,400
1,600
1,200
1,000
800
600
400
200
0
2003 2004
(a)
2005
1,571
1,347
1,347
1,093
Barclaycard
Head office functions
and other operations
(b)
International Retail and
Commercial Banking
Barclays Capital
UK Banking
Wealth Management
Notes
(a) Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became
effective from 1st January 2005. Further explanation is provided on page 134.
(b) Head office functions and other operations comprises discontinued
businesses in transition.