Barclays 2007 Annual Report Download - page 263

3
Financial statements
49 Fair value of financial instruments (continued)
Notes
a Fair value approximates carrying value due to the short-term nature of these financial assets and liabilities.
b Financial instruments at fair value (including those held for trading, designated at fair value, derivatives and available for sale) are either priced with
reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using a valuation model, 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.
The expected cash flows for each contract are determined either directly by reference to actual cash flows implicit in observable market prices or
through modelling cash flows using appropriate financial-markets pricing models. Wherever possible these models use as their basis observable
market prices and rates including, for example, interest rate yield curves, equities and commodities prices, option volatilities and currency rates.
The process of calculating fair value on illiquid instruments or from a valuation model may require estimation of certain pricing parameters,
assumptions or model characteristics. These estimates are calibrated against industry standards, economic models and observed transaction prices.
Changes to assumptions or estimated levels can potentially impact the fair value of an instrument as reported. The effect of changing these
assumptions, for those financial instruments for which the fair values were measured using valuation techniques that are determined in full or in part
on assumptions that are not supported by observable market prices, to a range of reasonably possible alternative assumptions, would be to increase
the fair value by up to £1.5bn (2006: £0.1bn) or to decrease the fair value by up to £1.2bn (2006: £0.1bn).
These variations in the assumptions have been estimated on a product by product basis and form part of the Bank’s internal control processes over
the determination of fair value.
The valuation model used for a particular instrument, the quality and liquidity of market data used for pricing, other fair value adjustments not
specifically captured by the model, market data and assumptions or estimates in these are all subject to internal review and approval procedures and
consistent application between accounting periods.
The amount that has yet to be recognised in income that relates to the difference between the transaction price (the fair value at initial recognition)
and the amount that would have arisen had valuation models using unobservable inputs been used on initial recognition, less amounts subsequently
recognised, was as follows:
2007 2006
At 31st December £m £m
At 1st January 534 260
New transactions 134 359
Amounts recognised in profit or loss during the year (514) (85)
At 31st December 154 534
The net asset fair value position of the related financial instruments increased by £2,842m for the year ended 31st December 2007 (31st December
2006: £2,814m). In many cases these changes in fair values were offset by changes in fair values of other financial instruments, which were priced
in active markets or valued by using a valuation technique which is supported by observable market prices or rates, or by transactions which have
been realised.
c The fair value for loans and advances, and other lending (including reverse repurchase agreements and cash collateral on securities borrowed) is
calculated using discounted cash flows, applying either market rates where practicable or, where the counterparty is a bank, rates currently offered by
other financial institutions for placings with similar characteristics. In many cases the fair value approximates carrying value because the instruments
are short term in nature or have interest rates that reprice frequently.
d The fair value of customer accounts other deposits and other borrowings (including repurchase agreements and cash collateral on securities lent) is
estimated using market rates at the balance sheet date. The fair value of these instruments approximate to carrying amount in most cases because,
in general, they are short term in nature and reprice frequently.
e Fair values of short-term debt securities in issue are approximately equal to their carrying amount. Fair values of other debt securities in issue are
based on quoted prices where available, or where these are unavailable, are estimated using other valuation techniques.
f The calculated fair values for dated and undated convertible and non-convertible loan capital were based upon quoted market rates for the issue
concerned or equivalent issues with similar terms and conditions.
The Group considers that, given the lack of an established market, the diversity of fee structures and the difficulty of separating the value of the
instruments from the value of the overall transaction, it is not meaningful to provide an estimate of the fair value of financial commitments and
contingent liabilities.
Barclays PLC Annual Report 2007 261