Barclays 2006 Annual Report Download - page 163

Barclays PLC
Annual Report 2006 159
Financial statements
3
19. Insurance contracts and investment contracts
The Group offers wealth management, term assurance, annuity,
property and payment protection insurance products to customers
that take the form of long- and short-term insurance contracts.
The Group classifies its wealth management and other products as
insurance contracts where these transfer significant insurance risk,
generally where the benefits payable on the occurrence of an insured
event are at least 5% more than the benefits that would be payable if
the insured event does not occur.
Barclays Wealth contracts that do not contain significant insurance
risk or discretionary participation features are classified as investment
contracts. Financial assets and liabilities relating to investment
contracts, and assets backing insurance contracts are classified and
measured as appropriate under IAS 39, ‘Financial Instruments:
Recognition and Measurement’.
Long-term insurance contracts
These contracts, insure events associated with human life (for example,
death or survival) over a long duration. Premiums are recognised as
revenue when they become payable by the contract holder. Claims and
surrenders are accounted for when notified. Maturities on the policy
maturity date and regular withdrawals are accounted for when due.
A liability for contractual benefits that are expected to be incurred in
the future is recorded when the premiums are recognised, based on the
expected discounted value of the benefit payments and directly related
administration costs, less the expected discounted value of the future
premiums that would be required to meet the benefits and other
expenses. The calculation of the liability contains assumptions
regarding mortality, maintenance expenses and investment income.
Liabilities under unit-linked life insurance contracts (such as
endowment policies) in addition reflect the value of assets held within
unitised investment pools.
Short-term insurance contracts
Under its payment protection insurance products the Group is
committed to paying benefits to the policyholder rather than forgiving
interest or principal on the occurrence of an insured event, such as
unemployment, sickness, or injury. Property insurance contracts mainly
compensate the policyholders for damage to their property or for the
value of property lost.
Premiums are recognised as revenue proportionally over the period of
the coverage. Claims and claims handling costs are charged to income
as incurred, based on the estimated liability for compensation owed to
policyholders arising from events that have occurred up to the balance
sheet date even if they have not yet been reported to the Group, based
on assessments of individual cases reported to the Group and statistical
analyses for the claims incurred but not reported.
Deferred acquisition costs (DAC)
Commissions and other costs that are related to securing new
insurance and investment contracts are capitalised and amortised over
the estimated lives of the relevant contracts.
Deferred income liability
Fees that are designed to recover commissions and other costs related
to either securing new insurance and investment contracts or renewing
existing investment contracts are included as a liability and amortised
over the estimated life of the contract.
Value of business acquired
On acquisition of a portfolio of contracts, such as through the acquisition
of a subsidiary, the Group recognises an intangible asset representing the
value of business acquired (VOBA), representing the future profits
embedded in acquired insurance contracts and investment contracts
with a discretionary participation feature. The asset is amortised over the
remaining terms of the acquired contracts.
Liability adequacy test
Liability adequacy tests are performed at each balance sheet date to
ensure the adequacy of contract liabilities net of DAC and VOBA assets.
Current best estimates of future contractual cash flows, claims handling
and administration costs, and investment returns from the assets
backing the liabilities are taken into account in the tests. Where a
deficiency is highlighted by the test, DAC and VOBA assets are written
off first, and insurance liabilities increased when these are written off in
full. Any deficiency is immediately recognised in the income statement.
Reinsurance
Short- and long-term insurance business is ceded to reinsurers under
contracts to transfer part or all of one or more of the following risks:
mortality, investment and expenses. All such contracts are dealt with as
insurance contracts. The benefits to which the Group is entitled under
its reinsurance contracts are recognised as reinsurance assets. The
Group assesses reinsurance assets at each balance sheet date. If there
is objective evidence of impairment, the carrying amount of the
reinsurance asset is reduced accordingly resulting in a charge to the
income statement.
Prior to 1st January 2005
The Group treated all products taking the legal form of an insurance
contract as insurance contracts.
From 1st January 2004 the Group has chosen to change its accounting
policy in relation to insurance contracts to use Modified Statutory
Solvency Basis rather than an Embedded Value basis to account
for insurance policies in the UK. This change resulted in insurance
contracts and investment contracts being accounted for on a similar
basis and represents the most appropriate accounting policy in the
circumstances. This change in policy reduced other operating income
by £47m in 2004 and reduced retained earnings by £592m as at
1st January 2004. The impact on earnings per share was immaterial.
20. Leases
Lessor
Assets leased to customers under agreements, which transfer
substantially all the risks and rewards of ownership, with or without
ultimate legal title, are classified as finance leases. When assets are held
subject to a finance lease, the present value of the lease payments,
discounted at the rate of interest implicit in the lease, is recognised as
a receivable. The difference between the total payments receivable
under the lease and the present value of the receivable is recognised as
unearned finance income, which is allocated to accounting periods
under the pre-tax net investment method to reflect a constant periodic
rate of return.
Assets leased to customers under agreements which do not transfer
substantially all the risks and rewards of ownership are classified as
operating leases. The leased assets are included within property, plant
and equipment on the Group’s balance sheet and depreciation is
provided on the depreciable amount of these assets on a systematic
basis over their estimated useful lives. Lease income is recognised on a
straight-line basis over the period of the lease unless another systematic
basis is more appropriate.
Lessee
The leases entered into by the Group are primarily operating leases.
Operating lease rentals payable are recognised as an expense in the
income statement on a straight-line basis over the lease term unless
another systematic basis is more appropriate.
21. Employee benefits
The Group provides employees worldwide with post-retirement benefits
mainly in the form of pensions. The Group operates a number of
pension schemes which may be funded or unfunded and of a defined
contribution or defined benefit nature. In addition, the Group
contributes, according to local law in the various countries in which it