Barclays 2006 Annual Report Download - page 161

Barclays PLC
Annual Report 2006 157
Financial statements
3
statement at the same time as the hedged item. The criteria required for
a derivative instrument to be classified as a designated hedge are that:
(i) the transaction must be reasonably expected to match or eliminate
a significant proportion of the risk inherent in the assets, liabilities,
other positions or cash flows being hedged and which results from
potential movements in market rates and credit risk; and
(ii) adequate evidence of the intention to hedge and linkage with the
underlying risk inherent in the assets, liabilities, other positions or
cash flows being hedged, must be established at the outset of the
transaction.
Designated hedges are reviewed for effectiveness by regular tests to
determine that the hedge is closely negatively correlated to the
designated hedged position in each and every identified time band in
the maturity profile.
Profits and losses on interest rate swaps and options entered into for
hedging purposes are measured on an accrual accounting basis,
included in the related category of income and expense and reported as
part of the yield on the hedged transaction. Amounts paid or received
over the life of futures contracts are deferred until the contract is closed;
accumulated deferred amounts on futures contracts and settlement
amounts paid or received on forward contracts are accounted for as
elements of the carrying value of the associated instrument, affecting
the resulting yield.
A premium paid or received in respect of a credit derivative hedging an
asset or liability is amortised over the life of the protection purchased or
sold against either interest payable or interest receivable. Where a credit
event occurs which triggers a recovery under the credit derivative, then
the recovery will be offset against the profit and loss charge on the
underlying asset or liability.
Foreign exchange contracts which qualify as hedges of foreign currency
exposures, including positions relating to investments the Group makes
outside the UK, are retranslated at the closing rate with any forward
premium or discount recognised over the life of the contract in net
interest income.
Profits and losses related to qualifying hedges, including foreign
exchange contracts, of firm commitments and probable anticipated
transactions are deferred and recognised in income or as adjustments
to carrying amounts when the hedged transactions occur.
Hedging transactions that are superseded or cease to be effective
are measured at fair value. Any profit or loss on these transactions,
together with any profit or loss arising on hedging transactions that
are terminated prior to the end of the life of the asset, are deferred and
amortised into interest income or expense over the remaining life of
the item previously being hedged. When the underlying asset, liability
position or cash flow is terminated prior to the hedging transaction,
or an anticipated transaction is no longer likely to occur, the hedging
transaction is measured on the fair value accounting basis, as described
in the section on derivatives used for trading purposes below, prior to
being transferred to the trading portfolio. The profit or loss arising from
the fair value measurement prior to the transfer to the trading portfolio
is included in the category of income or expense relating to the
previously hedged transaction.
13. Property, plant and equipment
Property and equipment is stated at cost less accumulated depreciation
and provisions for impairment, if any. Additions and subsequent
expenditures are capitalised only to the extent that they enhance the
future economic benefits expected to be derived from the assets.
Depreciation is provided on the depreciable amount of items of property
and equipment on a straight-line basis over their estimated useful
economic lives. The depreciable amount is the gross carrying amount,
less the estimated residual value at the end of its useful economic life.
The Group uses the following annual rates in calculating depreciation:
Freehold buildings and long-leasehold property
(more than 50 years to run) 2-3.3%
Leasehold property Over the remaining
(less than 50 years to run) life of the lease
Costs of adaptation of freehold and
leasehold property(a) 7-10%
Equipment installed in freehold and
leasehold property(a) 7-10%
Computers and similar equipment 20-33%
Fixtures and fittings and other equipment 10-20%
Note
(a) Where leasehold property has a remaining useful life of less than 15 years,
costs of adaptation and installed equipment are depreciated over the
remaining life of the lease.
Depreciation rates, methods and the residual values underlying the
calculation of depreciation of items of property, plant and equipment
are kept under review to take account of any change in circumstances.
When deciding on depreciation rates and methods, the principal factors
the Group takes into account are the expected rate of technological
developments and expected market requirements for, and the expected
pattern of usage of, the assets. When reviewing residual values, the
Group estimates the amount that it would currently obtain for the
disposal of the asset after deducting the estimated cost of disposal if the
asset were already of the age and condition expected at the end of its
useful economic life.
No depreciation is provided on freehold land, although, in common
with all long-lived assets, it is subject to impairment testing, if deemed
appropriate.
Gains and losses on disposals are determined by comparing the
proceeds with the carrying amount and are recognised in the income
statement.
14. Intangible assets
Goodwill
Goodwill arises on the acquisition of subsidiary and associated entities
and joint ventures, and represents the excess of the fair value of the
purchase consideration and direct costs of making the acquisition,
over the fair value of the Group’s share of the assets acquired, and
the liabilities and contingent liabilities assumed on the date of
the acquisition.
For the purpose of calculating goodwill, fair values of acquired assets,
liabilities and contingent liabilities are determined by reference to
market values or by discounting expected future cash flows to present
value. This discounting is either performed using market rates or by
using risk-free rates and risk-adjusted expected future cash flows.
Goodwill is capitalised and reviewed annually for impairment, or more
frequently when there are indications that impairment may have
occurred. Goodwill is allocated to cash-generating units for the purpose
of impairment testing. Goodwill on acquisitions of associates and joint
ventures is included in the amount of the investment. Gains and losses
on the disposal of an entity include the carrying amount of the goodwill
relating to the entity sold.
The carrying amount of goodwill in the UK GAAP balance sheet as at
31st December 2003 has been brought forward without adjustment on
transition to IFRSs.
Computer software
Computer software is stated at cost, less amortisation and provisions
for impairment, if any.
The identifiable and directly associated external and internal costs of
acquiring and developing software are capitalised where the software is