Barclays 2006 Annual Report Download - page 158

In the case of private equity investments, listed and unlisted investments
are stated at cost less any provision for impairment.
8. Impairment of financial assets
The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset or a portfolio of financial assets
carried at amortised cost is impaired. A financial asset or portfolio of
financial assets is impaired and impairment losses are incurred if, and
only if, there is objective evidence of impairment as a result of one or
more loss events that occurred after the initial recognition of the asset
and prior to the balance sheet date (‘a loss event’) and that loss event
or events has had an impact on the estimated future cash flows of the
financial asset or the portfolio that can be reliably estimated. Objective
evidence that a financial asset or a portfolio is impaired includes
observable data that comes to the attention of the Group about the
following loss events:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or
principal payments;
c) the lender, for economic or legal reasons relating to the borrower’s
financial difficulty, granting to the borrower a concession that the
lender would not otherwise consider;
d) it becomes probable that the borrower will enter bankruptcy or
other financial reorganisation;
e) the disappearance of an active market for that financial asset
because of financial difficulties; or
f) observable data indicating that there is a measurable decrease in
the estimated future cash flows from a portfolio of financial assets
since the initial recognition of those assets, although the decrease
cannot yet be identified with the individual financial assets in the
portfolio, including:
(i) adverse changes in the payment status of borrowers in the
portfolio;
(ii) national or local economic conditions that correlate with
defaults on the assets in the portfolio.
The Group first assesses whether objective evidence of impairment
exists individually for financial assets that are individually significant,
and individually or collectively for financial assets that are not
individually significant. If the Group determines that no objective
evidence of impairment exists for an individually assessed financial
asset, whether significant or not, it includes the asset in a group of
financial assets with similar credit risk characteristics and collectively
assesses them for impairment. Assets that are individually assessed
for impairment and for which an impairment loss is or continues to be
recognised are not included in a collective assessment of impairment.
For loans and receivables and assets held to maturity, the amount of
impairment loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. The amount of
the loss is recognised using an allowance account and recognised in
the income statement.
The calculation of the present value of the estimated future cash flows
of a collateralised financial asset reflect the cash flows that may result
from foreclosure costs for obtaining and selling the collateral, whether
or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, financial
assets are grouped on the basis of similar risk characteristics, taking into
account asset type, industry, geographical location, collateral type, past-
due status and other relevant factors. These characteristics are relevant
to the estimation of future cash flows for groups of such assets by being
indicative of the counterparty’s ability to pay all amounts due according
to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively
evaluated for impairment are estimated on the basis of the contractual
cash flows of the assets in the group and historical loss experience for
assets with credit risk characteristics similar to those in the group.
Historical loss experience is adjusted based on current observable data
to reflect the effects of current conditions that did not affect the period
on which the historical loss experience is based and to remove the
effects of conditions in the historical period that do not currently exist.
The methodology and assumptions used for estimating future cash
flows are reviewed regularly to reduce any differences between loss
estimates and actual loss experience.
Following impairment, interest income is recognised using the original
effective rate of interest which was used to discount the future cash
flows for the purpose of measuring the impairment loss.
When a loan is uncollectable, it is written off against the related
provision for loan impairment. Such loans are written off after all the
necessary procedures have been completed and the amount of the loss
has been determined. Subsequent recoveries of amounts previously
written off are credited to the income statement.
If, in a subsequent period, the amount of the impairment loss decreases
and the decrease can be related objectively to an event occurring after
the impairment was recognised, the previously recognised impairment
loss is reversed by adjusting the allowance account. The amount of the
reversal is recognised in the income statement.
Equity securities acquired in exchange for loans and advances in order
to achieve an orderly realisation are accounted for as a disposal of the
loan and an acquisition of equity securities. Where control is obtained
over an entity as a result of the transaction, the entity is consolidated.
Any further impairment of the assets or business acquired is treated as
an impairment of the relevant asset or business and not as an
impairment of the original instrument.
In the case of equity instruments classified as available for sale, a
significant or prolonged decline in the fair value of the security below
its cost is considered in determining whether impairment exists. Where
such evidence exists, the cumulative net loss that has been previously
recognised directly in equity is removed from equity and recognised in
the income statement. In the case of debt instruments classified as
available for sale, impairment is assessed based on the same criteria as all
other financial assets. Reversals of impairment of debt instruments are
recognised in the income statement. Reversals of impairment of equity
shares are not recognised in the income statement, increases in the fair
value of equity shares after impairment are recognised directly in equity.
Prior to 1st January 2005
Specific provisions are raised when the Group considers that the
creditworthiness of a borrower has deteriorated such that the recovery
of the whole or part of an outstanding advance is in serious doubt.
Typically, this is done on an individual basis, although scope exists
within the retail businesses, where the portfolio comprises
homogeneous assets and where statistical techniques are appropriate,
to raise specific provisions on a portfolio basis.
General provisions are raised to cover losses which are judged to be
present in loans and advances at the balance sheet date, but which have
not been specifically identified as such. These provisions are adjusted at
least half yearly by an appropriate charge or release of general provision
based on a statistical analysis. The accuracy of this analysis is
periodically assessed against actual losses. Gradings are used to rate the
credit quality of borrowers. Each grade corresponds to an Expected
Default Frequency and is calculated by using manual or computer
driven score-sheets validated by an analysis of the Group’s own
Consolidated accounts Barclays PLC
Accounting policies
Barclays PLC
Annual Report 2006
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