Barclays 2007 Annual Report Download - page 171

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Financial statements
Barclays PLC Annual Report 2007 169
11. Collateral and netting
The Group enters into master agreements with counterparties whenever
possible and, when appropriate, obtains collateral. Master agreements
provide that, if an event of default occurs, all outstanding transactions
with the counterparty will fall due and all amounts outstanding will be
settled on a net basis.
Collateral
The Group obtains collateral in respect of customer liabilities where this
is considered appropriate. The collateral normally takes the form of a lien
over the customer’s assets and gives the Group a claim on these assets
for both existing and future liabilities.
The Group also receives collateral in the form of cash or securities in
respect of other credit instruments, such as stock borrowing contracts,
and derivative contracts in order to reduce credit risk. Collateral received
in the form of securities is not recorded on the balance sheet. Collateral
received in the form of cash is recorded on the balance sheet with a
corresponding liability. These items are assigned to deposits received from
bank or other counterparties. Any interest payable or receivable arising is
recorded as interest expense or interest income respectively except for
funding costs relating to trading activities which are recorded in net
trading income.
Netting
Financial assets and liabilities are offset and the net amount reported
in the balance sheet if, and only if, there is a legally enforceable right to
set off the recognised amounts and there is an intention to settle on a net
basis, or to realise an asset and settle the liability simultaneously. In many
cases, even though master netting agreements are in place, the lack of an
intention to settle on a net basis results in the related assets and liabilities
being presented gross in the balance sheet.
12. Hedge accounting
Derivatives are used to hedge interest rate, exchange rate, commodity, and
equity exposures and exposures to certain indices such as house price
indices and retail price indices related to non-trading positions.
Where derivatives are held for risk management purposes, and when
transactions meet the criteria specified in IAS 39, the Group applies
fair value hedge accounting, cash flow hedge accounting, or hedging
of a net investment in a foreign operation as appropriate to the risks
being hedged.
When a financial instrument is designated as a hedge, the Group formally
documents the relationship between the hedging instrument and hedged
item as well as its risk management objectives and its strategy for
undertaking the various hedging transactions. The Group also documents
its assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
The Group discontinues hedge accounting when:
(i) It is determined that a derivative is not, or has ceased to be, highly
effective as a hedge;
(ii) the derivative expires, or is sold, terminated, or exercised;
(iii)the hedged item matures or is sold or repaid; or
(iv)a forecast transaction is no longer deemed highly probable.
In certain circumstances, the Group may decide to cease hedge accounting
even though the hedge relationship continues to be highly effective by
no longer designating the financial instrument as a hedging instrument.
To the extent that the changes in the fair value of the hedging derivative
differ from changes in the fair value of the hedged risk in the hedged item;
or the cumulative change in the fair value of the hedging derivative differs
from the cumulative change in the fair value of expected future cash flows
of the hedged item, the hedge is deemed to include ineffectiveness. The
amount of ineffectiveness, provided it is not so great as to disqualify the
entire hedge for hedge accounting, is recorded in the income statement.
Fair value hedge accounting
Changes in fair value of derivatives that qualify and are designated as
fair value hedges are recorded in the income statement, together with
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk.
If the hedge relationship no longer meets the criteria for hedge
accounting, it is discontinued. For fair value hedges of interest rate risk,
the fair value adjustment to the hedged item is amortised to the income
statement over the period to maturity of the previously designated hedge
relationship using the effective interest method.
If the hedged item is sold or repaid, the unamortised fair value adjustment
is recognised immediately in the income statement.
Cash flow hedges
For qualifying cash flow hedges, the fair value gain or loss associated
with the effective portion of the cash flow hedge is recognised initially
in shareholders’ equity, and recycled to the income statement in the
periods when the hedged item will affect profit or loss. Any ineffective
portion of the gain or loss on the hedging instrument is recognised in the
income statement immediately.
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity and is recognised when
the hedged item is ultimately recognised in the income statement. When a
forecast transaction is no longer expected to occur, the cumulative gain or
loss that was recognised in equity is immediately transferred to the
income statement.
Hedges of net investments
Hedges of net investments in foreign operations, including monetary items
that are accounted for as part of the net investment, are accounted for
similarly to cash flow hedges; the effective portion of the gain or loss on
the hedging instrument is recognised directly in equity and the ineffective
portion is recognised immediately in the income statement. The cumulative
gain or loss previously recognised in equity is recognised in the income
statement on the disposal or partial disposal of the foreign operation.
Hedges of net investments may include non-derivative liabilities as well as
derivative financial instruments although for a non-derivative liability only
the foreign exchange risk is designated as a hedge.
Derivatives that do not qualify for hedge accounting
Derivative contracts entered into as economic hedges that do not qualify
for hedge accounting are held at fair value through profit or loss.
13. Property, plant and equipment
Property and equipment is stated at cost less accumulated depreciation
and provisions for impairment, if any. Additions and subsequent
expenditures are capitalised only to the extent that they enhance the
future economic benefits expected to be derived from the assets.
Depreciation is provided on the depreciable amount of items of property
and equipment on a straight-line basis over their estimated useful
economic lives. The depreciable amount is the gross carrying amount,
less the estimated residual value at the end of its useful economic life.