Barclays 2006 Annual Report Download - page 157

Barclays PLC
Annual Report 2006 153
Financial statements
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(ii) part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent
actual pattern of short-term profit-taking; or
(iii)a derivative, except for a derivative that is a financial guarantee
contract or a designated and effective hedging instrument.
Financial instruments cannot be transferred into or out of this category
after inception. Financial instruments included in this category are
recognised initially at fair value and transaction costs are taken directly
to the Income statement. Gains and losses arising from changes in fair
value are included directly in the Income statement. The instruments
are derecognised when the rights to receive cash flows have expired
or the Group has transferred substantially all the risks and rewards of
ownership and the transfer qualifies for derecognition.
Regular way purchases and sales of financial instruments held for
trading or designated under the fair value option are recognised on
trade date, being the date on which the Group commits to purchase
or sell the asset.
The fair value option is used in the following circumstances:
(i) financial assets backing insurance contracts and financial assets
backing investment contracts are designated at fair value through
profit or loss because the related liabilities have cash flows that are
contractually based on the performance of the assets or the related
liabilities are insurance contracts whose measurement incorporates
current information. Fair valuing the assets through profit and loss
significantly reduces the recognition inconsistencies that would
arise if the financial assets were classified as available for sale;
(ii) financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss if they contain substantive embedded
derivatives;
(iii)financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss where doing so significantly reduces
measurement inconsistencies that would arise if the related
derivatives were treated as held for trading and the underlying
financial instruments were carried at amortised cost; and
(iv)certain private equity and other investments that are managed, and
evaluated on a fair value basis in accordance with a documented
risk management or investment strategy and reported to key
management personnel on that basis.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and
which are not classified as available for sale. Loans and receivables are
initially recognised at fair value including direct and incremental
transaction costs. They are subsequently valued at amortised cost,
using the effective interest method (see accounting policy 6 on page
152). They are derecognised when the rights to receive cash flows have
expired or the Group has transferred substantially all the risks and
rewards of ownership.
Regular way purchases and sales of loans and receivables are
recognised on contractual settlement.
Held to maturity
Held to maturity investments are non-derivative financial assets with
fixed or determinable payments that the Group’s management has the
intention and ability to hold to maturity. They are initially recognised at
fair value including direct and incremental transaction costs. They are
subsequently valued at amortised cost, using the effective interest
method (see accounting policy 6). They are derecognised when the
rights to receive cash flows have expired.
Purchases of held to maturity financial assets are recognised on trade
date, being the date on which the Group commits to purchase the asset.
Available for sale
Available for sale assets are non-derivative financial assets that are
designated as available for sale and are not categorised into any of the
other categories described above. They are initially recognised at fair
value including direct and incremental transaction costs. They are
subsequently held at fair value. Gains and losses arising from changes
in fair value are included as a separate component of equity until sale
when the cumulative gain or loss is transferred to the income
statement. Interest determined using the effective interest method
(see accounting policy 6), impairment losses and translation differences
on monetary items are recognised in the income statement. The assets
are derecognised when the rights to receive cash flows have expired
or the Group has transferred substantially all the risks and rewards
of ownership.
Regular way purchases and sales of available for sale financial
instruments are recognised on trade date, being the date on which the
Group commits to purchase or sell the asset.
Financial liabilities
Financial liabilities are measured at amortised cost, except for trading
liabilities and liabilities designated at fair value, which are held at fair
value through profit or loss. Financial liabilities are derecognised when
extinguished.
Determining fair value
Where the classification of a financial instrument requires it to be stated
at fair value, this is determined by reference to the quoted bid price or
asking price (as appropriate) in an active market wherever possible.
Where no such active market exists for the particular asset or liability,
the Group uses a valuation technique to arrive at the fair value,
including the use of prices obtained in recent arms-length transactions,
discounted cash flow analysis, option pricing models and other
valuation techniques commonly used by market participants.
Profits or losses are only recognised on initial recognition when such
profits can be measured solely by reference to observable current
market transactions or valuation techniques based solely on observable
market inputs.
Prior to 1st January 2005, financial assets were accounted for as follows:
Loans and advances
Loans and advances, other than those held in a dealing portfolio, are
recorded in the balance sheet at cost, less interest in suspense debited
to the customer’s account, specific and general provisions. Advances
held in a dealing portfolio for the purpose of trading on a secondary
market are valued at the lower of cost and market value.
Investment securities
Investment securities are debt securities and equity shares intended
for use on a continuing basis by the Group and identified as such.
Investment securities are stated at cost less any provision for
impairment. The cost of dated investment securities is adjusted for the
amortisation of premiums or discounts on purchase over the period to
redemption. The amortisation of premiums and discounts is included
in interest receivable.
Other debt securities and equity shares are stated at market value and
profits and losses arising from this revaluation are taken directly to the
income statement through dealing profits. Listed securities are valued
based on market prices, with long positions at bid and short positions
at offer price. Unlisted securities are valued based on the Directors’
estimate, which takes into consideration discounted cash flows, price
earnings ratios and other valuation techniques.