Barclays 2006 Annual Report Download - page 67

Financial review
Off-balance sheet arrangements
Barclays PLC
Annual Report 2006 63
Operating review
1
Off-balance sheet arrangements
In the ordinary course of business and primarily to facilitate client
transactions, the Group enters into off-balance sheet arrangements.
These arrangements include the provision of guarantees on behalf
of the Group’s customers, retained interests in assets which have been
transferred to an unconsolidated entity and obligations arising out
of variable interests in an unconsolidated entity.
Guarantees
In the normal course of business, the Group issues guarantees on behalf
of its customers. In the majority of cases, Barclays will hold collateral
against the exposure, have a right of recourse to the customer or both.
In addition, Barclays issues guarantees on its own behalf. The main
types of guarantees provided are financial guarantees given to banks
and financial institutions on behalf of customers to secure loans,
overdrafts and other banking facilities, including stock borrowing
indemnities and standby letters of credit. Other guarantees provided
include performance guarantees, advance payment guarantees, tender
guarantees, guarantees to Her Majesty’s Revenue and Customs and
retention guarantees. Further details on these guarantees are provided
in Note 60 (o) to the accounts.
Derivatives on own shares
During the period Barclays entered into a cash-settled total return swap
referencing its own ordinary shares. This instrument provides a hedge
against the employers’ national insurance liability arising on employee
share schemes, where the eventual liability is determined by reference
to the Barclays share price. As at 31st December, the notional of this
derivative was 12.4 million shares and the fair value was £9.5m. Under
IFRSs, cash flow hedge accounting has been applied when accounting
for the gains and losses arising on this derivative.
Special purpose and variable interest entities
The off-balance sheet arrangements entered into by the Group typically
involve the use of special purpose entities (SPEs) as defined under SIC 12
and variable interest entities (VIEs) under FIN 46-R. These are entities
that are set up for a specific purpose and generally would not enter into
an operating activity nor have any employees. The most common form
of SPE involves the acquisition of financial assets that are funded by the
issuance of securities to external investors, which have cash flows
different from those of the underlying instruments. The repayment
of these securities is determined by the performance of the assets
acquired by the SPE. These entities form an integral part of many
financial markets, and are important to the development of the
securitisation markets and functioning of the US commercial
paper market. The accounting treatment under IFRSs and US GAAP is
summarised in Note 60 on page 251, with further information on the
US GAAP treatment provided in Note 60 (m) on pages 268 and 269.
Credit structuring business
The Group structures investments with specific risk profiles which are
attractive to investors. This business involves the sale by the Group of
credit exposures based on an underlying portfolio of assets into SPEs,
often using credit derivative contracts. The assets are funded by
issuing securities with varying terms. The Group may also provide other
financial services, which include the provision of liquidity or contingent
liquidity facilities, act as derivatives counterparty as well as the
purchasing and warehousing of securities until they are sold to the SPE.
The commitments to provide liquidity to these SPEs is a maximum of
£6.4bn (2005: £1.1bn).
Asset securitisations
The Group assists companies with the formation of asset
securitisations. These entities have minimal equity and rely on
funding in the form of notes to purchase the assets for securitisation.
The Group provides financing in the form of senior notes and/or junior
notes and may also provide derivatives to the SPE.
The Group has also used SPEs to securitise part of its originated and
purchased retail and commercial lending portfolios and credit card
receivables. Under US GAAP, where the Group has sold the assets to a
Qualifying SPE (QSPE), the QSPE is not consolidated by the Group. This
resulted in the derecognition of assets of £5,359m as at 31st December
2006 (2005: £6,953m) under US GAAP. Following the sale of these
assets to the securitisation vehicles, the Group may retain servicing
rights and an interest in the residual income of the SPEs. Under IFRS, the
SPEs are consolidated where the Group is exposed to the majority of the
risks and rewards of the transaction. Further details are included in Note
60 (n) to the accounts.
Client intermediation
The Group is involved in structuring transactions as a financial
intermediary to meet investor and client needs. These transactions
involve entities structured by either the Group or the client and they are
used to modify cash flows of third-party assets to create investments
with specific risk or return profiles or to assist clients in the efficient
management of other risks. The Group also invests in lessor entities
specifically to acquire assets for leasing. Client intermediation also
includes arrangements to fund the purchase or construction of specific
assets (most common in the property industry). Certain entities that are
consolidated in accordance with IAS 27 and SIC 12 under IFRS are
deconsolidated under US GAAP where the Group is not the primary
beneficiary. The impact on the Group’s total assets under US GAAP is
an increase of £5,920m (2005: reduction of £327m).
Fund management
The Group provides asset management services to a large number of
investment entities on an arms-length basis and at market terms and
prices. The majority of these entities are investment funds that are
owned by a large and diversified number of investors. These funds are
not consolidated under either IFRS or US GAAP because the Group does
not own either a significant portion of the equity, or the risks and
rewards inherent in the assets.