Barclays 2006 Annual Report Download - page 274

Notes to the accounts
For the year ended 31st December 2006
Barclays PLC
Annual Report 2006
270
60 Differences between IFRS and US GAAP accounting principles (continued)
(n) Securitisations
Credit card securitisations
The Group transfers beneficial interests in portfolios of Barclaycard branded credit card receivable assets to Gracechurch Receivables Trustee
Limited, which in turn issues investor certificates to Barclaycard Funding PLC, a subsidiary of Barclays Bank PLC. By purchasing the investor
certificates, Barclaycard Funding PLC obtains an equitable beneficial interest in the cash flows arising from the securitised assets and then issues
Medium Term Loan Notes to the Gracechurch Card Funding vehicles which are Qualifying Special Purpose Entities (‘QSPEs’).
QSPEs sell Loan Notes to investors, who are then entitled to receive specified cash flows during the life of the security. The QSPEs use the proceeds
from the sale of the investor Loan Notes to purchase the Medium Term Loan Notes from Barclaycard Funding PLC. The proceeds of the issuance of
the investor certificates by Gracechurch Receivables Trustee Limited are then distributed to the Group as consideration for the beneficial interests in
the credit card receivables transferred.
Following a securitisation, the Group receives fees for servicing the receivables and providing cash management services and payment of deferred
consideration for the sale of the beneficial interest in the excess income over and above the interest paid and payable to the noteholder and other
expenses. The Group maintains an interest in the pool of receivables that are available for securitisation, referred to as the seller’s interest.
Investors have no recourse against the Group if cash flows generated from the securitised assets are not sufficient to service the obligations of
the QSPEs.
The Group has no right or obligation to repurchase the benefit of any securitised balance, except if certain representations and warranties given by
the Group at the time of transfer are breached.
The Group has entered into interest rate currency swaps with the QSPEs. These swaps convert a proportion of the Sterling variable interest flows
arising from the Loan Note Certificates to US Dollar variable and fixed rate interest flows to match the interest payable on the Medium Term
Notes issued.
The transfer of receivables is accounted for as a sale under US GAAP where control of the receivables has been relinquished. A gain or loss is
recognised on securitisation of the receivables which is calculated based on the previous carrying amount of the loans involved in the transfer
(allocated between the receivables sold and the seller’s interest based on their relative fair values at the date of sale).
The Group estimates the fair value of the retained interests by determining the present value of future expected cash flows using valuation models
that incorporate management’s best estimates of key assumptions, which include:
(a) the expected prepayment rate of the receivables each year;
(b) the anticipated credit losses from the receivables; and
(c) a discount rate to calculate future income flows.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded
at fair value with subsequent adjustments reflected in net income.
The servicing liability represents the shortfall of future servicing income from the Group’s obligation to service the transferred assets compared
to the adequate compensation of servicing those assets. The servicing liability is amortised over the expected life of the receivables.
Credit card securitisation activity during the year
During 2006, the Group securitised credit card receivables with a book value of £112m (2005: £3,497m) recognising a resultant pre-tax gain
on sale under US GAAP of £7m (2005: £174m, 2004: £38m). The Group has recognised an interest only strip asset and a servicing liability in
connection with the transfer.
The derecognition of the securitised assets results in a reduction in net loans and advances to customers of £5,511m (2005: £6,648m).
Mortgage loans securitisation
In 2004, Barclays acquired and then securitised 10 static pools of residential mortgage loans which were originated by unaffiliated mortgage
companies. Certain of these securitisations were affected through the sale of mortgage loans to QSPEs. During 2005, Barclays acquired and then
securitised an additional 10 pools of residential mortgage loans; however, these securitisations did not qualify for sale accounting and are treated
as financing transactions.
To fund the acquisition of these mortgage loans, the trust issued Floating Rate Notes (FRNs). The FRNs were underwritten by Barclays and sold to
third-party investors. The offering circulars for the issues of FRNs stated that they are the obligations of the respective trust only and are not
guaranteed by, or the responsibility of, any other party. A call right is held by the originator with the right to liquidate the trust if the principal balance
of the mortgage shares has fallen below 10% of their initial amount, provided all obligations under the bonds can be satisfied in full.
Mortgage loan securitisation activity during the year
During 2006, 17 whole loans and 4 commercial mortgage loan pools were acquired and securitised. Of these, 9 whole loans and 4 commercial
mortgage loan transactions qualified for sale accounting, and therefore non-returnable proceeds of these securitisations totalled £7,887m (2005:
£nil). There was a gain of £41m (2005: £nil, 2004: £25m) arising from the sale of 4 commercial mortgage loan pools.
The retained interests that are subject to prepayment risk such that the Group may not recover substantially all of its investment are recorded at fair
value with subsequent adjustments reflected in net income. The remaining eight securitisations did not qualify for sale accounting and are treated
as financing transactions.