Barclays 2006 Annual Report Download - page 156

For the purposes of translation into the presentational currency, assets,
liabilities and equity of foreign operations are translated at the closing
rate, and items of income and expense are translated into Sterling at
the rates prevailing on the dates of the transactions, or average rates
of exchange where these approximate to actual rates.
The exchange differences arising on the translation of a foreign
operation are included in cumulative translation reserves within
shareholders’ equity and included in the profit or loss on disposal
or partial disposal of the operation.
Goodwill and fair value adjustments arising on the acquisition of foreign
subsidiaries are maintained in the functional currency of the foreign
operation, translated at the closing rate and are included in hedges
of net investments where appropriate.
On transition to IFRS, the Group brought forward a nil opening balance
on the cumulative foreign currency translation adjustment arising from
the retranslation of foreign operations, which is shown as a separate
item in shareholders’ equity.
6. Interest, fees and commissions
Interest
Interest is recognised in interest income and interest expense in the
income statement for all interest bearing financial instruments classified
as held to maturity, available for sale or other loans and receivables
using the effective interest method.
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 application of the method
has the effect of recognising income (and expense) receivable
(or payable) on the instrument evenly in proportion to the amount
outstanding over the period to maturity or repayment.
In calculating effective interest, the Group estimates cash flows (using
projections based on its experience of customers’ behaviour)
considering all contractual terms of the financial instrument but
excluding future credit losses. Fees, including those for early
redemption, are included in the calculation to the extent that they can
be measured and are considered to be an integral part of the effective
interest rate. Cash flows arising from the direct and incremental costs
of issuing financial instruments are also taken into account in the
calculation. Where it is not possible to otherwise estimate reliably the
cash flows or the expected life of a financial instrument, effective
interest is calculated by reference to the payments or receipts specified
in the contract, and the full contractual term.
Fees and commissions
Unless included in the effective interest calculation, fees and
commissions are recognised on an accruals basis as the service is
provided. Fees and commissions not integral to effective interest arising
from negotiating, or participating in the negotiation of a transaction
from a third party, such as the acquisition of loans, shares or other
securities or the purchase or sale of businesses, are recognised on
completion of the underlying transaction. Portfolio and other
management advisory and service fees are recognised based on the
applicable service contracts. Asset management fees related to
investment funds are recognised over the period the service is provided.
The same principle is applied to the recognition of income from wealth
management, financial planning and custody services that are
continuously provided over an extended period of time.
Commitment fees, together with related direct costs, for loan facilities
where draw down is probable are deferred and recognised as an
adjustment to the effective interest on the loan once drawn.
Commitment fees in relation to facilities where draw down is not
probable are recognised over the term of the commitment.
Insurance premiums
Insurance premiums are recognised in the period earned.
Net trading income
Income arises from the margins which are achieved through market-
making and customer business and from changes in market value
caused by movements in interest and exchange rates, equity prices
and other market variables. Trading positions are held at fair value and
the resulting gains and losses are included in the Income statement,
together with interest and dividends arising from long and short
positions and funding costs relating to trading activities.
Dividends from subsidiaries
In the individual financial statements of Barclays PLC, dividends from
subsidiaries are accounted for on the basis of dividends received in the
accounting period.
Prior to 1st January 2005
Interest
Interest income is recognised in the income statement as it accrues,
with the exception of interest on non-performing loans as set out in
accounting policy 8.
Fees and commissions
Fee income relating to loans and advances is recognised in the income
statement to match the cost of providing a continuing service, together
with a reasonable profit margin. Where a fee is charged in lieu of
interest, it is recognised in the income statement as interest receivable
on a level yield basis over the life of the advance. Fees and commissions
receivable in respect of all other services provided are recognised in the
income statement when the related services are performed and when
considered recoverable.
Mortgage indemnity premiums
Premiums are deferred and included in accruals and deferred income in
the Group balance sheet. Following regular reviews of the amount of
income required to cover anticipated losses in respect of this lending,
deferred income is released to the income statement on an annual basis.
Insurance premiums
Insurance premiums are recognised in the period earned.
Lending related fees and commissions payable and incentives
Fees and commissions payable to introducers in respect of obtaining
certain lending business, where this is the primary form of distribution,
are charged to the income statement as fees and commissions payable,
over the anticipated life of the loans.
The costs of mortgage incentives, which comprise cashbacks and
interest discounts, are charged to the income statement as a reduction
to interest receivable as incurred.
7. Financial assets and liabilities
Financial assets
The Group classifies its financial assets in the following categories:
financial instruments at fair value through profit or loss; loans and
receivables; held to maturity investments and available for sale financial
assets. Management determines the classification of financial assets
and liabilities at initial recognition.
Financial instruments at fair value through profit or loss
Financial instruments are classified in this category if they are held for
trading, or if they are designated by management under the fair value
option. Instruments are classified as held for trading if they are:
(i) acquired principally for the purposes of selling or repurchasing in
the near term;
Consolidated accounts Barclays PLC
Accounting policies
Barclays PLC
Annual Report 2006
152