Barclays 2007 Annual Report Download - page 169

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Financial statements
Barclays PLC Annual Report 2007 167
(ii) financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss if they contain substantive embedded derivatives;
(iii)financial assets, loans to customers, financial liabilities, financial
guarantees and structured notes may be designated at fair value
through profit or loss where doing so significantly reduces
measurement inconsistencies that would arise if the related
derivatives were treated as held for trading and the underlying
financial instruments were carried at amortised cost; and
(iv)certain private equity and other investments that are managed, and
evaluated on a fair value basis in accordance with a documented risk
management or investment strategy and reported to key
management personnel on that basis.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and which
are not classified as available for sale. Loans and receivables are initially
recognised at fair value including direct and incremental transaction costs.
They are subsequently valued at amortised cost, using the effective
interest method (see accounting policy 6). They are derecognised when
the rights to receive cash flows have expired or the Group has transferred
substantially all the risks and rewards of ownership.
Regular way purchases and sales of loans and receivables are recognised
on contractual settlement.
Held to maturity
Held to maturity investments are non-derivative financial assets with
fixed or determinable payments that the Group’s management has the
intention and ability to hold to maturity. They are initially recognised at
fair value including direct and incremental transaction costs. They are
subsequently valued at amortised cost, using the effective interest
method (see accounting policy 6). They are derecognised when the
rights to receive cash flows have expired.
Regular way purchases of held to maturity financial assets are recognised
on trade date, being the date on which the Group commits to purchase
the asset.
Available for sale
Available for sale assets are non-derivative financial assets that are
designated as available for sale and are not categorised into any of the
other categories described above. They are initially recognised at fair value
including direct and incremental transaction costs. They are subsequently
held at fair value. Gains and losses arising from changes in fair value are
included as a separate component of equity until sale when the
cumulative gain or loss is transferred to the income statement. Interest
determined using the effective interest method (see accounting policy 6),
impairment losses and translation differences on monetary items are
recognised in the income statement. The assets are derecognised when
the rights to receive cash flows have expired or the Group has transferred
substantially all the risks and rewards of ownership.
Regular way purchases and sales of available for sale financial instruments
are recognised on trade date, being the date on which the Group commits
to purchase or sell the asset.
Embedded derivatives
Some hybrid contracts contain both a derivative and a non-derivative
component. In such cases, the derivative component is termed an
embedded derivative. Where the economic characteristics and risks of the
embedded derivatives are not closely related to those of the host contract,
and the host contract itself is not carried at fair value through profit or loss,
the embedded derivative is bifurcated and reported at fair value with gains
and losses being recognised in the income statement.
Profits or losses cannot be recognised on the initial recognition of
embedded derivatives unless the host contract is also carried at fair value.
Financial liabilities
Financial liabilities are measured at amortised cost, except for trading
liabilities and liabilities designated at fair value, which are held at fair
value through profit or loss. Financial liabilities are derecognised when
extinguished.
Determining fair value
Where the classification of a financial instrument requires it to be stated
at fair value, fair value is determined by reference to a quoted market price
for that instrument or by using a valuation model. Where the fair value is
calculated using financial markets pricing models, the methodology is to
calculate the expected cash flows under the terms of each specific
contract and then discount these values back to a present value. These
models use as their basis independently sourced market parameters
including, for example, interest rate yield curves, equities and commodities
prices, option volatilities and currency rates. For financial liabilities
measured at fair value, the carrying amount is adjusted to reflect the effect
on fair value of changes in own credit spreads. Most market parameters
are either directly observable or are implied from instrument prices.
The model may perform numerical procedures in the pricing such as
interpolation when input values do not directly correspond to the most
actively traded market trade parameters. However, where valuations
include significant unobservable inputs, the transaction price is deemed to
provide the best evidence of initial fair value for accounting purposes. As
such, profits or losses are recognised upon trade inception only when such
profits can be measured solely by reference to observable market data.
The difference between the model valuation and the initial transaction
price is recognised in profit or loss:
a) on a straight-line basis over the term of the transaction, or over the
period until all model inputs will become observable where
appropriate, or;
b) released in full where previously unobservable inputs become
observable.
Various factors influence the availability of observable inputs and these
may vary from product to product and change over time. Factors include
for example, the depth of activity in the relevant market, the type of
product, whether the product is new and not widely traded in the market
place, the maturity of market modelling, the nature of the transaction
(bespoke or generic). To the extent that valuation is based on models
or inputs that are not observable in the market, the determination of fair
value can be more subjective, dependant on the significance of the
unobservable input to the overall valuation. Unobservable inputs are
determined based on the best information available, for example by
reference to similar assets, similar maturities or other analytical
techniques.
8. Impairment of financial assets
The Group assesses at each balance sheet date whether there is objective
evidence that loans and receivables or available for sale financial
investments are impaired. These are impaired and impairment losses are
incurred if, and only if, there is objective evidence of impairment as a result
of one or more loss events that occurred after the initial recognition of the
asset and prior to the balance sheet date (‘a loss event’) and that loss
event or events has had an impact on the estimated future cash flows of
the financial asset or the portfolio that can be reliably estimated. The
criteria that the Group uses to determine that there is objective evidence
of an impairment loss include:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or
principal payments;
c) the lender, for economic or legal reasons relating to the borrower’s
financial difficulty, granting to the borrower a concession that the
lender would not otherwise consider;
d) it becomes probable that the borrower will enter bankruptcy or other
financial reorganisation;
e) the disappearance of an active market for that financial asset because
of financial difficulties; or