Barclays 2006 Annual Report Download - page 259

Barclays PLC
Annual Report 2006 255
Financial statements
3
60 Differences between IFRS and US GAAP accounting principles (continued)
For those standards that were not adopted until 1st January 2005, UK GAAP continued to be applied throughout 2004 in accordance with IFRS
transition rules. Therefore, for 31st December 2004, the differences relating to Derivatives, Fair value of securities, Loan origination and
Extinguishment of liabilities are the same as those previously reported and have been provided on page 258.
IFRS (2004 only) US GAAP (2004 only)
Derivatives
Derivatives used for hedging purposes are measured on an accruals
basis consistent with the assets, liabilities, positions or future cash flows
being hedged. The gains and losses on these instruments (arising from
changes in fair value) are not recognised in the profit and loss account
immediately as they arise. Such gains are either not recognised in the
balance sheet or are recognised and carried forward. When the hedged
transaction occurs, the gain or loss is recognised in the profit and loss
account at the same time as the hedged item.
Derivatives entered into as trading transactions, together with any
associated hedging, are measured at fair value, and the resultant profits
and losses are included in dealing profits.
Products which contain embedded derivatives are valued with reference
to the total product inclusive of the derivative element.
Fair value of securities
Positions in investment debt securities and investment equity shares
are stated at cost less any provision for impairment. The cost of dated
investment securities is adjusted for the amortisation of premiums
or discount on purchase over the period to redemption. Investment
securities are those intended for use on a continuing basis by the Group.
Loan origination
Fee income relating to the origination of loans is recognised in the profit
and loss account to match the cost over the period in which the service
is provided, together with a reasonable profit margin.
The cost of mortgage incentives, which comprise cashbacks and interest
discounts, are charged to the profit and loss account as a reduction to
interest receivable as incurred.
Extinguishment of liabilities
Under FRS 5, a liability is extinguished if an entity’s obligation to
transfer economic benefits is satisfied, removed or is no longer likely
to occur. Satisfaction would encompass an ‘in-substance’ defeasance
transaction where liabilities are satisfied from the cash flows arising from
essentially risk free assets transferred by the debtor to an irrevocable
defeasance trust.
SFAS 133 requires all derivatives to be recorded at fair value as adjusted
by the requirements of EITF 02-03. If certain conditions are met then the
derivative may be designated as a fair value hedge, cash flow hedge or
hedge of the foreign currency exposure of a net investment in a foreign
subsidiary. The change in value of the fair value hedge is recorded in
income along with the change in fair value of the hedged asset or
liability. The change in value of a cash flow hedge is recorded in other
comprehensive income and reclassified to income as the hedged cash
flows affect earnings. The change in the value of a net investment hedge
is recorded in the currency translation reserve and only released to
income when the underlying investment is sold. With a limited number
of exceptions, Barclays has chosen not to update the documentation of
derivative hedges to comply fully with the requirements of SFAS 133.
Certain terms and conditions of hybrid contracts which themselves
would be standalone derivatives are bifurcated from the underlying
hybrid contract and fair valued if they are not clearly and closely related
to the contract in which they are contained. These are referred to as
embedded derivatives.
Under SFAS 115, debt and marketable equity securities are classified
as one of three types. Trading securities are carried at fair value with
changes in fair value taken through profit and loss; held to maturity debt
securities are carried at amortised cost where there is the ability and
intent to hold to maturity; available for sale securities that are held for
continuing use in the business are carried at fair value with movements
in fair value recorded in shareholders’ equity. Declines in fair value below
cost that are deemed other-than-temporary impairment are recognised
on the held to maturity and available for sale categories and are
reflected in the profit and loss account.
Non-marketable securities held by investment companies are carried at
fair value with movements in fair value recorded in net income.
SFAS 91 requires loan origination fees and incremental direct costs of
loan origination to be deferred and amortised over the life of the loan as
an adjustment to interest income.
Under SFAS 140, a debtor may derecognise a liability if and only if
either (a) the debtor pays the creditor and is relieved of its obligation
for the liability, or (b) the debtor is legally released from being the
primary obligor under the liability either financially or by the creditor.
SFAS 140 does not allow for the derecognition of a liability by means
of an ‘in-substance’ defeasance transaction or if it is no longer believed
likely that the liability will be settled.
Any adjustments included in the reconciliations of IFRS to US GAAP provided on pages 258 to 274 and pages 288 and 289 that are not described
above have arisen from refinements of methodology arising from the Group’s conversion to IFRS.